Comparing this bubble with previous real estate booms is downright silly. There has never been a run up like this one, so looking at history as your guide to how the market may react is not going to be particularly instructive. In previous markets we never had massive amounts of option ARM loans that could put borrowers in a world of hurt in a year to two. We've also not had a real estate market where 30-40% of transactions are for investment purposes. Weve also never seen annual price growth on a national basis of nearly 15% like we did last year, which could be erased in a few months. We've also never had interest rates so persistently low. And on top of this, there was still a supply boom, which when demand drops like a rock, isnt going anywhere. Inventory is already popping and its just a few months into the downturn. I could go on and on, but it's so irritating to have to keep repeating myself....grrrrrrrrrrrrr.
I have a bet going with a friend of mine who lives in Manhattan Beach, California. I bet him that real (accounting for inflation) August 2010 Manhattan Beach housing prices will be at least 25% lower than in August of 2005. He thinks that there is no way that he'll lose. I think I've got a good shot at winning. The prize- a good bottle of wine.
There was an OFHEO analysis a few years ago of several bubble markets during the last real estate bust. Even though this report was composed a few years back, it is still useful for the data and graphs I think. They cover the bubbles in San Francisco, San Jose, Boston and Honolulu:
Geoff, I understand the arguments why this time is different - or at least worse - but its still helpful to look at a history. You may be correct that the price drop will be larger (40% in real terms was pretty big the last time!) and may last longer ... very possible.
So what's the next bubble? If it ain't houses, and the stock market isn't moving, where's all the cash going to flow?
Any bets? I'm guessing foreign currencies.
So far, the bond markets are absorbing large sums of cash and keeping interest rates quite low, which may mitigate housing bubble deflation. Fed may not be able to dominate interest rates as planned, due to risk flight into bonds. The crazoids and doomsters have already run up gold to $700 an ounce. And you can only keep so much under your mattress.
CR - Im not saying dont look at history at all. The feedback mechanisms are still the same, so it's not useless. But to use in a way that the bubble apologists continue to do, saying, "national prices have never fallen, so therefore they cant, etc, etc" is absurd. We have never encountered this type of market, so all bets to the downside are off.
Clinton's military base closures in the 90's had a lot to do with the real estate skid in CA. As did Greenspan hiking rates in 1994. Folks in my neighborhood were just packing up the truck and tossing the house keys to the mortgage company. Prices recovered when the tech bubble got started and jobs picked up, and when Clinton cut real estate taxes and folks could take capital gains tax free and buy a bigger house.
Geoff - great post! I coudn't have said it better. Kudos!
Old Vet - Foreign central bankers are cranking out their own fiat currency/debt bubbles. As fast as Helicopter Ben generates more $$, they are buying them to prevent their home currencies from wrecking their exports and increasing unemployment. There will be a short term correction in the dollar, but it's only a long term bear market blip. All paper currencies (and things denominated in them) are in big trouble.
History teaches that it's NEVER different THIS time.
We're in the latter stage of a global credit bubble that has been supporting a progressive shifting of asset price bubbles. Remember Beany Babies? (Only sort of kidding..lol.)
Deflations are caused by contracting money supplies. As ARM's reset on marginal "liar's loans" the cycle will proceed from default to foreclosure to auction. Soon, many bank financial statements will show negative capital and lending will slow to a crawl.
As for RE values... I'd be surprised if Manhattan Beach real estate is WORTH 25% of its current value when all this junk debt goes into the dumpster...
There will be a pop - there were too many speculators using too much leverage. When they walk and banks foreclose, property values will crash in many neighbourhoods as the banks sell the homes for hefty discounts. But you already guessed that. You just can't say it since there are no facts to back this up.
Some people think that housing prices will decline only a bit because housing has value to homeowners. But in this kind of market, foreclosures will cause prices to plummet once they get dumped on the market. Heady times ahead folks.
It may be a just a little premature to put So. Cal's real estate boom in a pine box.
There's a home in Placentia, CA being offered at $975k that I believe recently fell out of escrow @ more than a million dollars. In Jan, 2004 this very same house was SOLD for $650k. SO, using this house as an indicator of the irrational CA boom, what % drop will determine this boom's a bust?
That's just 2 1/3 years, folks.
Bailey - there were buyers on the downside of the NASDAQ too, remember? When Sun peaked at over $60 in 2000, the smart money was running to the exit. Who did they sell to on the way down? The dumb money. Where is Sun now - $5.
This isnt to say the home will be $250,000 soon, but it can and likely will decline. The buyer of that house will be the dumb money in this bubble. And they will be the type who borrows the entire purchase with a negative amortization loan, since it is the only way they can afford it, and they still cling to the "if I dont buy now, I'll never own a home" theory. They'll be muttering "but prices never fall in the housing market" to themselves as they walk around zombie like after the foreclosure in a two years.
Lets play a little game, with ten houses and 15 people. 10 buy, 5 rent. Then one of the renters wants to buy, since prices are going up, he's scared he'll never get a foothold, and he wants to get in on the gains he sees in the market. Fortunately, interest rates drop like a rock during a recession, in fact, like never before, so now, he has a chance. Then the price gains go up more, so one of the homeowners gets greedy, and wants a second home. He borrows against his house price gains to get another. Then another renter wants in, and borrows at increasingly easy terms, 30 years, interst only, 5% down. Prices go up further. People in the next town, or country, see the gains, and they want in. More borrowing, easier terms - negative amortization, 40 years, zero down, borrow the closing costs. Price go up further. Another renter moves in, a subprime, who couldnt buy, but now they will lend money to this person with no income documentation. And on and on it goes. As prices keep spiraling up, though, people forget, to keep selling this bunch of houses requires INCREASING sums of money. Meanwhile, back at the ranch (the Fed) rates start going up. Banks, in response, loosen credit further (50 yr loans, etc). But at this point, the game is up. The sales rate drops, even though prices appear to still be going up (one big reason is that they are stated in year over year terms, so you need about 9 months of slight declines often before you see a year over year decline. So the real estate apologists say, look, prices are still rising. Yes, to some extent they are, but also, the only homes being sold are the ones that meet the ask, and price dont reflect the ask on the reduced homes that still arent selling. So, at this point, when returns are starting to flatten, financing costs cant get any easier, all the renters who could fog a mirror bought, and the smart money is getting ready to take their cap gains, how exactly are you going to get more price increases.
The smart and the dumb. When to buy and when to sell. What about those periods in between when you are living and working at something that provides you with the means to buy? Making a contribution to your community that is intent on exploiting any dumb moves you make. And who are you forchrisake not to follow suit and exploit these nincompoops?
The community needs exemplars of efficiency (esp now with CEOs getting caught back dating their Options). That means you.
So get out there and clean up on the dummies --its not as bad as it sounds.
For all of you fans of the likes of Thornberg and Shiller, ponder this:
While Thornberg's housing predictions are being widely derided due to the length of time he been wrong and his recent change of heart as to the nature of the coming "collapse", Shiller's credibility has been sustained by his supposed past timely calling of the stock market bubble, at least amongst the press and most of the don't-know-any-better public.
I saved this July, 1996, article "Price Earnings Ratios as Forecasters of Returns: The Stock Market Outlook in 1996" by "stock-market expert", Professor Robert Shiller of Yale University. His conclusion:
"It appears that long run investors should stay out of the market for the next decade."
On July 1, 1996, the S&P 500 Index was 671. Today, nearly a "decade" later, the S&P Index closed at 1,261.81 (dividends not included).
The ability to get publicity is not the same as accuracy, and those who are in the markets with actual money do not and never have ever listened to either one of those pilgrims.
Comparing this bubble with previous real estate booms is downright silly. There has never been a run up like this one, so looking at history as your guide to how the market may react is not going to be particularly instructive. In previous markets we never had massive amounts of option ARM loans that could put borrowers in a world of hurt in a year to two. We've also not had a real estate market where 30-40% of transactions are for investment purposes. Weve also never seen annual price growth on a national basis of nearly 15% like we did last year, which could be erased in a few months. We've also never had interest rates so persistently low. And on top of this, there was still a supply boom, which when demand drops like a rock, isnt going anywhere. Inventory is already popping and its just a few months into the downturn. I could go on and on, but it's so irritating to have to keep repeating myself....grrrrrrrrrrrrr.
I have a bet going with a friend of mine who lives in Manhattan Beach, California. I bet him that real (accounting for inflation) August 2010 Manhattan Beach housing prices will be at least 25% lower than in August of 2005. He thinks that there is no way that he'll lose. I think I've got a good shot at winning. The prize- a good bottle of wine.
Observer,
Ask your friend in Manhattan Beach if he wants to make that same bet with me.
By my calculations, odds are 20 to 1 that you win the bet. Good goin'!
There was an OFHEO analysis a few years ago of several bubble markets during the last real estate bust. Even though this report was composed a few years back, it is still useful for the data and graphs I think. They cover the bubbles in San Francisco, San Jose, Boston and Honolulu:
http://www.ofheo.gov/Media/Archive/house/2q02hpi.pdf
Their recent report has interesting historical numbers as well:
http://www.ofheo.gov/media/pdf/4q05hpi.pdf
The Association of Bay Area Governments also has a good chart of home sale prices in California from 1982-1995 (last boom-bust cycle):
Median Home Sales Prices 1982-95
Observer, I think that is a good bet. Good luck!
JS, thanks for those links.
Geoff, I understand the arguments why this time is different - or at least worse - but its still helpful to look at a history. You may be correct that the price drop will be larger (40% in real terms was pretty big the last time!) and may last longer ... very possible.
Best to all.
So what's the next bubble? If it ain't houses, and the stock market isn't moving, where's all the cash going to flow?
Any bets? I'm guessing foreign currencies.
So far, the bond markets are absorbing large sums of cash and keeping interest rates quite low, which may mitigate housing bubble deflation. Fed may not be able to dominate interest rates as planned, due to risk flight into bonds. The crazoids and doomsters have already run up gold to $700 an ounce. And you can only keep so much under your mattress.
CR - Im not saying dont look at history at all. The feedback mechanisms are still the same, so it's not useless. But to use in a way that the bubble apologists continue to do, saying, "national prices have never fallen, so therefore they cant, etc, etc" is absurd. We have never encountered this type of market, so all bets to the downside are off.
Clinton's military base closures in the 90's had a lot to do with the real estate skid in CA. As did Greenspan hiking rates in 1994. Folks in my neighborhood were just packing up the truck and tossing the house keys to the mortgage company. Prices recovered when the tech bubble got started and jobs picked up, and when Clinton cut real estate taxes and folks could take capital gains tax free and buy a bigger house.
Geoff - great post! I coudn't have said it better. Kudos!
Old Vet - Foreign central bankers are cranking out their own fiat currency/debt bubbles. As fast as Helicopter Ben generates more $$, they are buying them to prevent their home currencies from wrecking their exports and increasing unemployment. There will be a short term correction in the dollar, but it's only a long term bear market blip. All paper currencies (and things denominated in them) are in big trouble.
History teaches that it's NEVER different THIS time.
We're in the latter stage of a global credit bubble that has been supporting a progressive shifting of asset price bubbles. Remember Beany Babies? (Only sort of kidding..lol.)
Deflations are caused by contracting money supplies. As ARM's reset on marginal "liar's loans" the cycle will proceed from default to foreclosure to auction. Soon, many bank financial statements will show negative capital and lending will slow to a crawl.
As for RE values... I'd be surprised if Manhattan Beach real estate is WORTH 25% of its current value when all this junk debt goes into the dumpster...
There will be a pop - there were too many speculators using too much leverage. When they walk and banks foreclose, property values will crash in many neighbourhoods as the banks sell the homes for hefty discounts. But you already guessed that. You just can't say it since there are no facts to back this up.
Some people think that housing prices will decline only a bit because housing has value to homeowners. But in this kind of market, foreclosures will cause prices to plummet once they get dumped on the market. Heady times ahead folks.
It may be a just a little premature to put So. Cal's real estate boom in a pine box.
There's a home in Placentia, CA being offered at $975k that I believe recently fell out of escrow @ more than a million dollars. In Jan, 2004 this very same house was SOLD for $650k. SO, using this house as an indicator of the irrational CA boom, what % drop will determine this boom's a bust?
That's just 2 1/3 years, folks.
Bailey - there were buyers on the downside of the NASDAQ too, remember? When Sun peaked at over $60 in 2000, the smart money was running to the exit. Who did they sell to on the way down? The dumb money. Where is Sun now - $5.
This isnt to say the home will be $250,000 soon, but it can and likely will decline. The buyer of that house will be the dumb money in this bubble. And they will be the type who borrows the entire purchase with a negative amortization loan, since it is the only way they can afford it, and they still cling to the "if I dont buy now, I'll never own a home" theory. They'll be muttering "but prices never fall in the housing market" to themselves as they walk around zombie like after the foreclosure in a two years.
Lets play a little game, with ten houses and 15 people. 10 buy, 5 rent. Then one of the renters wants to buy, since prices are going up, he's scared he'll never get a foothold, and he wants to get in on the gains he sees in the market. Fortunately, interest rates drop like a rock during a recession, in fact, like never before, so now, he has a chance. Then the price gains go up more, so one of the homeowners gets greedy, and wants a second home. He borrows against his house price gains to get another. Then another renter wants in, and borrows at increasingly easy terms, 30 years, interst only, 5% down. Prices go up further. People in the next town, or country, see the gains, and they want in. More borrowing, easier terms - negative amortization, 40 years, zero down, borrow the closing costs. Price go up further. Another renter moves in, a subprime, who couldnt buy, but now they will lend money to this person with no income documentation. And on and on it goes. As prices keep spiraling up, though, people forget, to keep selling this bunch of houses requires INCREASING sums of money. Meanwhile, back at the ranch (the Fed) rates start going up. Banks, in response, loosen credit further (50 yr loans, etc). But at this point, the game is up. The sales rate drops, even though prices appear to still be going up (one big reason is that they are stated in year over year terms, so you need about 9 months of slight declines often before you see a year over year decline. So the real estate apologists say, look, prices are still rising. Yes, to some extent they are, but also, the only homes being sold are the ones that meet the ask, and price dont reflect the ask on the reduced homes that still arent selling. So, at this point, when returns are starting to flatten, financing costs cant get any easier, all the renters who could fog a mirror bought, and the smart money is getting ready to take their cap gains, how exactly are you going to get more price increases.
The smart and the dumb. When to buy and when to sell. What about those periods in between when you are living and working at something that provides you with the means to buy? Making a contribution to your community that is intent on exploiting any dumb moves you make. And who are you forchrisake not to follow suit and exploit these nincompoops?
The community needs exemplars of efficiency (esp now with CEOs getting caught back dating their Options). That means you.
So get out there and clean up on the dummies --its not as bad as it sounds.
For all of you fans of the likes of Thornberg and Shiller, ponder this:
While Thornberg's housing predictions are being widely derided due to the length of time he been wrong and his recent change of heart as to the nature of the coming "collapse", Shiller's credibility has been sustained by his supposed past timely calling of the stock market bubble, at least amongst the press and most of the don't-know-any-better public.
I saved this July, 1996, article "Price Earnings Ratios as Forecasters of Returns: The Stock Market Outlook in 1996" by "stock-market expert", Professor Robert Shiller of Yale University. His conclusion:
"It appears that long run investors should stay out of the market for the next decade."
On July 1, 1996, the S&P 500 Index was 671. Today, nearly a "decade" later, the S&P Index closed at 1,261.81 (dividends not included).
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The ability to get publicity is not the same as accuracy, and those who are in the markets with actual money do not and never have ever listened to either one of those pilgrims.