Anon, yes, in certain areas prices are close to the nominal bottom - this is a key point. In general, these are areas I'd prefer not to live in, but the prices are starting to make sense to investors.
But a more important point: In most areas, prices will probably continue to fall - and fall sharply.
I suspect those areas that are close to the price bottom will see stagnate prices for some time - and declining real prices.
I have come up with a model for RE prices (as per the C/S national index, and no it's not Wright B). According to this, we should reach the nominal price bottom March 09. As CR mentioned earlier, the more areas with higher price appreciation like CA wil probably reach the price equilibrium later as well as higher-price markets in general vs. lower priced markets. The lower end is always first to top and bottom out. The model is based upen Martin Armstrong's PI cycle. After March 09 I would see at least another year or two of real price losses, i.e. prices will not move up.
I wonder if you also see it similarly?
MiTurn, yes. I think if you look at the graph I put up for the different price ranges in LA, the areas that have been crushed the most are in the low price range.
We have to remember there is a lot of variability in the actual home prices that make up these indices. The property in this article is 50% off! The property I wrote about in Oceanside is over 60% off the price peak. These are REOs in heavy REO areas, and are priced to move.
BTW, some of these areas might be OK - potential buyers need to evaluate that themselves.
The problem with calling a bottom based on increased REO sales, is they are comp killers. It's like an endless negative feedback loop, where homeowners go increasingly negative on their equity as REO sales go up. This prohibits them from selling(or buying) anywhere else which, in itself, increases the probability of more foreclosures in the area. I also suspect, the pool of buyers who can actually get through underwriting will be rung out at some point, creating even more downward price pressure and distressed inventory.
I think you may be partially wrong about the return of the relative relationships between areas. In Boston, for example, desirable places like Newton, the South End and Cambridge recovered quickly from the last downturn, while the 'inferior' goods type neighborhoods took as many as seven years to recover their even their nominal values.
Why? First, there was a stigma on the less desirable neighborhoods due to the price declines as well as the negative externalities associated with foreclosures. Second, not only is income inequality growing in America, economic segregation is increasing, which concentrates high income people in certain neighborhoods increasing the relative disparity in prices.
When the less desirable areas finally did recover the prices did shoot up dramatically, as these 'inferior' areas have more elastic demand that's partially dependent on people being priced out of their first option neighborhoods.
Thanks, CR My outlook is far more negative but that may be due to my personality and lack of economic intelligence. I appreciate your thoughtfulness in calling them as you see them.
I live in Westchester, an affluent northearn county of NYC metro. Within about a mile of me, there are at least 30 homes on the market, all priced at more than $500,000.
Usually, there are about half that many this time of year.
On one stretch of a busy road not far from here, there are five homes in a row for sale.
None of the homes are cheap yet. But all are priced probably 10-15% below where they would have been 12-18 months ago, when prices here were through the roof. According to NY Times, a lot of homes are staying on the market 20+ weeks and getting 80-90% of ask.
Here's how I read this: People know it's going down and want to get out before it hits bottom and they are trapped.
Also, I know or have heard of several guys recently downsized from Wall Street related jobs. The downsizing in affluent white-collar America may get very ugly.
When you get downsized from a 150-200k job, you look to move, especially if you are age 50-60 and empty-nester.
Well if it is like an overvalued stock market, there are many who catch falling knives. They think a 50% decline in a stock means the bottom has been reached, only to find that it goes down another 25%. You need to do some fundamental analysis before you decide somthing has bottomed out. Lots of people don't bother.
Chris, yes, price changes alone really tell you very little (except that the prices have changed!). That is why in House Price Mosaic, I showed why some REO properties are now attractive to small investors - based on fundamentals.
--
"Â…and are probably closer to the price bottom."
Because prices are down 30-50% in these areas? You forget that prices in real terms are still way above their December 1995 prices. Many of these prices quadrupled in nominal terms and tripled in real terms.
We are long ways from the bottom, CR. I know that you want to get ahead in the line to call the bottoms in every category of sales and prices.
We should nickname you The Premature Bottom Caller.
I am not seeing salaries going up and there is a lot of belt tightening going on with consumable costs (energy, food, insurance, medical, education, etc.)
So where can someone reduce their expenditures? How about housing by moving in with others or lower rents.
I see rents declining into the future that has not been factored into these "investors" caluclations.
On anther note I am also seeing the psychology changing in second home ownership. Second home markets are probably in for a real fall in prices as nobody is going to want a liability.
I just want to remind people that the relationship between the cheaper areas and the expensive areas is not the same in every housing downturn.
In Los Angeles in the 1990s downturn, neighborhoods located fairly close to downtown in the cheaper less desirable zones went down LESS in nominal percentages than the more expensive neighborhoods located fairly close to downtown.
My first house was in a relatively stable good pocket of the otherwise undesirable South Los Angeles. I bought in 1988 for $145K, spent $15K on improvements and sold in 1993--after the LA riot--for $160K. I bought a replacement house equally close to downtown but far away from South LA for $255K. The highest price before the downturn on the same cul-de-sac of similarly sized house was $327K.
I remember Beverly Hills and Los Feliz both taking very deep cuts in value in that downturn. Houses in Ventura County went down so far that people were seeking re-assessments of their properties by the local tax collector. That exercise would not have done you any good at all in Baldwin Hills (an affluent hilly enclave surrounded by South Los Angeles). So, at least in Los Angeles, every bust is different.
So, Mr. Westchester County (NY) guy, what you're really asking is if you price your house 10-15% under asking prices of 12-18 months ago, will you receive 80-90% of asking after 20+ weeks (just as The New York Times clearly indicates), or will you get something less?
Well, who knows?
Maybe if you priced your house 25% under prices of 12-18 months ago, you could sell instantly and move to Florida right away, like you want to. How about that?
On my SoCal block of 30 homes, 6 are REO. All 6 have been buzzing with activity for the past couple of weeks: lawns being mowed, overdue repairs being made, potential buyers wandering around...
What I don't know is how many of those potential buyers are owner/occupants as opposed to speculators looking for "bargains." I use the term "bargains" loosely because pricing on the REO homes is still 100% higher than when I bought here in 2002.
Part of me wants them to be speculators that will lose their shirts once again when prices drop after Alt-A falls apart.
John Karevoll, an analyst with DataQuick Information Systems, also is seeing that REO prices have come down and more homes are closing escrow than a few months ago.
And we all know how useful Jan v Apr sales number are in predictting the future. Not.
CR Writes; "Areas with fewer REOs will exhibit "sticky prices" and the prices will probably decline for some time."
I've been arguing against "sticky" for a very long time. The only reason it still persists at this point as a theory is because past declines exhibited stickiness. Not this time. Look at the Case-Shiller graphs and the symmetry. Look at the cliff diving bubble market medians. Stickiness 2008 is beginning to sound like a NAR mantra circa 2006.
CR - IMO, Risks are massively to the downside for your assessment, in CA.
CA is signficantly more burdened by fuel price increases as commutes are much longer. It's a freeway culture - at just the wrong time. Also a massively over-levered consumer. Far more inclined to play with fire. White flight has drained capital leaving a deep debt hole. Governments are in the red. Businesses fleeing for more cost competitive areas. Social unrest is likely to unravel society.
barely, my forecast is for significant price declines in California. I thought this was clear.
Just because a few areas - with high REO activity - are probably approaching the nominal bottom, doesn't mean prices won't fall further in the other areas.
I believe it's a mistake to think of housing as monolithic. It's not. Different areas are seeing different dynamics.
Barely,
Where do you get that Californians have a freeway culture and commute longer? The BTS is quite clear that LA is metrotypical in these respects and SF is better than average. The state as a whole is unremarkable wrt to the burden of energy costs. Anecdotally, if my annual HVAC bill doubles to $450 I can drive a few less miles. What are the Northern tier States going to do about $3.64/gal heating oil and natgas shortages?
House prices down 25-30% in a year and half in many areas is "sticky"? And we won't know any areas nominal house price low until years after - only in retrospect. Why are some being so stupid about this; it was a ten year mania in house prices and it won't end until everyone's broke. Everyone.
I can vouch for the fact that prices are definitely sticky in the two dozen towns that form the hear of the Bay Area (around San Francisco and Silicon Valley) thought prices are dropping dramatically in the outlying neighborhoods.
I don't understand the dynamic but I have hundreds of first hand reports from buyers who have been closing in the past few months.
Rob Dawg, yes, but on the way up, supply and demand suggested prices should go up quickly.
Supply was diminished by speculators buying homes (modeled as storage) - or you could think of it as more demand.
Demand was spurred on by loose lending standards, and people buying for appreciation.
But when demand fell quickly, and supply soared, prices fell much slower than for any commodity. This is what "sticky prices" predicts. Sorry if I wasn't clear on that a few years ago - this is what I expected, several years of price declines.
Otherwise prices would already be another 20% lower (or whatever it would take to clear the market).
Not so much a disagreement as different terms. Of course I wouldn't expect lumber futures type responses which BTW don't presage a recovery anytime soon and correctly signaled the new homes bust. House futures contracts are LEAPS not spot trading. Within the multiyear timeframe of a homeownership "round trip" this time we aren't seeing stickiness. Witness the new phenomena of first payment defaults.
Prices very sticky here in Santa Cruz, even though sales are down roughly 50%. With the diversity of prices here due to view, proximity to the beach, freeway, mountains, acreage... everyone can find a recent sale that looks like their home and went for at least what they want to ask.
Only after sitting for a few months do the little nibbles come out of the listing price. This is going to drag out for years, again.
Fuel price increase in CA is offset by a better weather. We do not need to heat our homes for six months a year. My friend in MA spends around $350/month alone to heat this house from Oct to Apr. We spend less than $100 on AC from June to Oct.
Longer commute is offset by pretty good public transportation system. I see more and more employers providing free shuttles from BART and Caltrain stations, and more and more people are using them.
Silicon Valley jobs are still here, not affected by recession yet. The industry has suffered a recent boom, and is in a pretty healthy condition now.
State debt is mostly a result of extra socialism and Proposition 13 (yet another part of socialism).
Current market in good Bay Area areas led to almost no sales. People have money to pay for mortgages, and good areas have less to no subprimes. They are not in hurry to sell, and housing demands are high, since rents are rocketed.
All of this keeps prices up. Heck, Sunnyvale even has new townhouse development activity, which just started last Oct, and they're still building.
So far it looks like speculators did not buy anything in a good Bay Area cities/neighborhoods. Most places we've seen could be described as a "granite countertop with mahogany hardwood and a nice freeway view from the backyard". But good places reacted to the market crush with close to zero sales - people are just not selling. They don't need to, they're not speculators, they live there. It will require a recession followed by major layoffs for prices to decline dramatically in Bay Area.
No way at a price bottom.
Foreclosures are only going up from here. There aren't enough bottom catchers to keep it up.
Anon, yes, in certain areas prices are close to the nominal bottom - this is a key point. In general, these are areas I'd prefer not to live in, but the prices are starting to make sense to investors.
But a more important point: In most areas, prices will probably continue to fall - and fall sharply.
I suspect those areas that are close to the price bottom will see stagnate prices for some time - and declining real prices.
Best Wishes.
CR wrote: "In general, these are areas I'd prefer not to live in. . ."
CR, are these also areas that saw some of the initial rapid increases in prices?
CR,
I have come up with a model for RE prices (as per the C/S national index, and no it's not Wright B). According to this, we should reach the nominal price bottom March 09. As CR mentioned earlier, the more areas with higher price appreciation like CA wil probably reach the price equilibrium later as well as higher-price markets in general vs. lower priced markets. The lower end is always first to top and bottom out. The model is based upen Martin Armstrong's PI cycle. After March 09 I would see at least another year or two of real price losses, i.e. prices will not move up.
I wonder if you also see it similarly?
Thanks, O-Joe
MiTurn, yes. I think if you look at the graph I put up for the different price ranges in LA, the areas that have been crushed the most are in the low price range.
We have to remember there is a lot of variability in the actual home prices that make up these indices. The property in this article is 50% off! The property I wrote about in Oceanside is over 60% off the price peak. These are REOs in heavy REO areas, and are priced to move.
BTW, some of these areas might be OK - potential buyers need to evaluate that themselves.
Best Wishes.
The problem with calling a bottom based on increased REO sales, is they are comp killers. It's like an endless negative feedback loop, where homeowners go increasingly negative on their equity as REO sales go up. This prohibits them from selling(or buying) anywhere else which, in itself, increases the probability of more foreclosures in the area. I also suspect, the pool of buyers who can actually get through underwriting will be rung out at some point, creating even more downward price pressure and distressed inventory.
Will appraisers use REO's as comps?
I think you may be partially wrong about the return of the relative relationships between areas. In Boston, for example, desirable places like Newton, the South End and Cambridge recovered quickly from the last downturn, while the 'inferior' goods type neighborhoods took as many as seven years to recover their even their nominal values.
Why? First, there was a stigma on the less desirable neighborhoods due to the price declines as well as the negative externalities associated with foreclosures. Second, not only is income inequality growing in America, economic segregation is increasing, which concentrates high income people in certain neighborhoods increasing the relative disparity in prices.
When the less desirable areas finally did recover the prices did shoot up dramatically, as these 'inferior' areas have more elastic demand that's partially dependent on people being priced out of their first option neighborhoods.
Appraisers definitely use REO sales as comps. The days of "rubberstamping" contracts is over.
Thanks, CR My outlook is far more negative but that may be due to my personality and lack of economic intelligence. I appreciate your thoughtfulness in calling them as you see them.
I live in Westchester, an affluent northearn county of NYC metro. Within about a mile of me, there are at least 30 homes on the market, all priced at more than $500,000.
Usually, there are about half that many this time of year.
On one stretch of a busy road not far from here, there are five homes in a row for sale.
None of the homes are cheap yet. But all are priced probably 10-15% below where they would have been 12-18 months ago, when prices here were through the roof. According to NY Times, a lot of homes are staying on the market 20+ weeks and getting 80-90% of ask.
Here's how I read this: People know it's going down and want to get out before it hits bottom and they are trapped.
Also, I know or have heard of several guys recently downsized from Wall Street related jobs. The downsizing in affluent white-collar America may get very ugly.
When you get downsized from a 150-200k job, you look to move, especially if you are age 50-60 and empty-nester.
Well if it is like an overvalued stock market, there are many who catch falling knives. They think a 50% decline in a stock means the bottom has been reached, only to find that it goes down another 25%. You need to do some fundamental analysis before you decide somthing has bottomed out. Lots of people don't bother.
Chris, yes, price changes alone really tell you very little (except that the prices have changed!). That is why in House Price Mosaic, I showed why some REO properties are now attractive to small investors - based on fundamentals.
Best to all
Anyone buying today, even a REO, will be underwater by 2010. Employment security for CR and Tanta.
--
"Â…and are probably closer to the price bottom."
Because prices are down 30-50% in these areas? You forget that prices in real terms are still way above their December 1995 prices. Many of these prices quadrupled in nominal terms and tripled in real terms.
We are long ways from the bottom, CR. I know that you want to get ahead in the line to call the bottoms in every category of sales and prices.
We should nickname you The Premature Bottom Caller.
Jas
I am not seeing salaries going up and there is a lot of belt tightening going on with consumable costs (energy, food, insurance, medical, education, etc.)
So where can someone reduce their expenditures? How about housing by moving in with others or lower rents.
I see rents declining into the future that has not been factored into these "investors" caluclations.
On anther note I am also seeing the psychology changing in second home ownership. Second home markets are probably in for a real fall in prices as nobody is going to want a liability.
I just want to remind people that the relationship between the cheaper areas and the expensive areas is not the same in every housing downturn.
In Los Angeles in the 1990s downturn, neighborhoods located fairly close to downtown in the cheaper less desirable zones went down LESS in nominal percentages than the more expensive neighborhoods located fairly close to downtown.
My first house was in a relatively stable good pocket of the otherwise undesirable South Los Angeles. I bought in 1988 for $145K, spent $15K on improvements and sold in 1993--after the LA riot--for $160K. I bought a replacement house equally close to downtown but far away from South LA for $255K. The highest price before the downturn on the same cul-de-sac of similarly sized house was $327K.
I remember Beverly Hills and Los Feliz both taking very deep cuts in value in that downturn. Houses in Ventura County went down so far that people were seeking re-assessments of their properties by the local tax collector. That exercise would not have done you any good at all in Baldwin Hills (an affluent hilly enclave surrounded by South Los Angeles). So, at least in Los Angeles, every bust is different.
So, Mr. Westchester County (NY) guy, what you're really asking is if you price your house 10-15% under asking prices of 12-18 months ago, will you receive 80-90% of asking after 20+ weeks (just as The New York Times clearly indicates), or will you get something less?
Well, who knows?
Maybe if you priced your house 25% under prices of 12-18 months ago, you could sell instantly and move to Florida right away, like you want to. How about that?
Well, who knows?
Are all these bottom predictions factoring in continue ARM resets? Neg-Am, Alt-A, Prime ARMs... all garbage... all going bad.
On my SoCal block of 30 homes, 6 are REO. All 6 have been buzzing with activity for the past couple of weeks: lawns being mowed, overdue repairs being made, potential buyers wandering around...
What I don't know is how many of those potential buyers are owner/occupants as opposed to speculators looking for "bargains." I use the term "bargains" loosely because pricing on the REO homes is still 100% higher than when I bought here in 2002.
Part of me wants them to be speculators that will lose their shirts once again when prices drop after Alt-A falls apart.
John Karevoll, an analyst with DataQuick Information Systems, also is seeing that REO prices have come down and more homes are closing escrow than a few months ago.
And we all know how useful Jan v Apr sales number are in predictting the future. Not.
CR Writes; "Areas with fewer REOs will exhibit "sticky prices" and the prices will probably decline for some time."
I've been arguing against "sticky" for a very long time. The only reason it still persists at this point as a theory is because past declines exhibited stickiness. Not this time. Look at the Case-Shiller graphs and the symmetry. Look at the cliff diving bubble market medians. Stickiness 2008 is beginning to sound like a NAR mantra circa 2006.
CR - IMO, Risks are massively to the downside for your assessment, in CA.
CA is signficantly more burdened by fuel price increases as commutes are much longer. It's a freeway culture - at just the wrong time. Also a massively over-levered consumer. Far more inclined to play with fire. White flight has drained capital leaving a deep debt hole. Governments are in the red. Businesses fleeing for more cost competitive areas. Social unrest is likely to unravel society.
I think the bottom is a long way from here.
barely, my forecast is for significant price declines in California. I thought this was clear.
Just because a few areas - with high REO activity - are probably approaching the nominal bottom, doesn't mean prices won't fall further in the other areas.
I believe it's a mistake to think of housing as monolithic. It's not. Different areas are seeing different dynamics.
Note: Haloscan is a real pain again today.
Best Wishes.
Barely,
Where do you get that Californians have a freeway culture and commute longer? The BTS is quite clear that LA is metrotypical in these respects and SF is better than average. The state as a whole is unremarkable wrt to the burden of energy costs. Anecdotally, if my annual HVAC bill doubles to $450 I can drive a few less miles. What are the Northern tier States going to do about $3.64/gal heating oil and natgas shortages?
Rob Dawg, we are witnessing sticky prices.
If prices weren't sticky, they would have adjusted overnight - like for corn, wheat or other commodities based on supply and demand.
Sticky does NOT mean stuck! We are seeing classic sticky prices ..
Best Wishes.
A second wave of speculators!
Amazed by how widespread trashed houses are. It's not the value of a 5 year old three bedroom two bathroom house but one with $20,0000 in damages.
House prices down 25-30% in a year and half in many areas is "sticky"? And we won't know any areas nominal house price low until years after - only in retrospect. Why are some being so stupid about this; it was a ten year mania in house prices and it won't end until everyone's broke. Everyone.
CR- "Sticky does NOT mean stuck! We are seeing classic sticky prices .."
IMO, CR is correct. Hell, he's always right.
CR, can't you be wrong, just once?
Robert Cote, Anonymouse,
I can vouch for the fact that prices are definitely sticky in the two dozen towns that form the hear of the Bay Area (around San Francisco and Silicon Valley) thought prices are dropping dramatically in the outlying neighborhoods.
I don't understand the dynamic but I have hundreds of first hand reports from buyers who have been closing in the past few months.
"Asking" prices are sticky but the Case-Shiller metro curves of actual prices are near symmetrical are they not?
Rob Dawg, yes, but on the way up, supply and demand suggested prices should go up quickly.
Supply was diminished by speculators buying homes (modeled as storage) - or you could think of it as more demand.
Demand was spurred on by loose lending standards, and people buying for appreciation.
But when demand fell quickly, and supply soared, prices fell much slower than for any commodity. This is what "sticky prices" predicts. Sorry if I wasn't clear on that a few years ago - this is what I expected, several years of price declines.
Otherwise prices would already be another 20% lower (or whatever it would take to clear the market).
Best Wishes.
Not so much a disagreement as different terms. Of course I wouldn't expect lumber futures type responses which BTW don't presage a recovery anytime soon and correctly signaled the new homes bust. House futures contracts are LEAPS not spot trading. Within the multiyear timeframe of a homeownership "round trip" this time we aren't seeing stickiness. Witness the new phenomena of first payment defaults.
Prices very sticky here in Santa Cruz, even though sales are down roughly 50%. With the diversity of prices here due to view, proximity to the beach, freeway, mountains, acreage... everyone can find a recent sale that looks like their home and went for at least what they want to ask.
Only after sitting for a few months do the little nibbles come out of the listing price. This is going to drag out for years, again.
Barely,
All of this keeps prices up. Heck, Sunnyvale even has new townhouse development activity, which just started last Oct, and they're still building.
CR,
So far it looks like speculators did not buy anything in a good Bay Area cities/neighborhoods. Most places we've seen could be described as a "granite countertop with mahogany hardwood and a nice freeway view from the backyard". But good places reacted to the market crush with close to zero sales - people are just not selling. They don't need to, they're not speculators, they live there. It will require a recession followed by major layoffs for prices to decline dramatically in Bay Area.