CR - just in case we don't say it thanks. A lot of hard work. Very much looking forward to Part II on the macro implications. Judging from this week's WSJ nobody has taken a look at the numbers like you've done but the data is readily available. Greatly puzzling. Oops - exceept for Kasriel at NTrust.

An earlier post on New Home Sales was very interesting and would it be worth following up by looking at the graph some more. For the optimists to be right things need to start flattening now. But in the spirt of this cycle (business cycle not housing) is vastly different notice that Sales were running up in the late 90s with the boom and then accelerated even more. I could see at least too more conservative scenrarios just eyeballing the graph. One, the late 90s represent a structural shift and 800-1000K new homes per year is the new black. Or two, we've still not gotten back to a normal economy having disguised it all with a high fever and we'll go back to the 400-800K/year that was the range prior to the 90s. In either case it seems like we should be watching NHS like hawks.

Any comments or predictions ? And how would this play with your inventory concerns ?

Happy New Year btw.

I would add that allowing an owner to take $250K cap gains tax free after two years of primary residence encourages housing turnover and sales price pumping. My point is that this is a government policy that has pricing effects and I think of it as an accelerant. It doesn't have an effect on the way down.

Thanks CR!

Yahoo! 404 - Page Not Found
the condo situation in florida is near meltdown.

Here's the Center for Responsible Lending's testimony before Senate committees, “Calculated Risk: Assessing Non-Traditional Mortgage Products” September 20, 2006 (Page Not Found picture of the sub prime mortgage piece of the "soft landing" pie.

I wonder why so many people think a recession is something to be avoided. I beleive recessions are good. Like a forest that needs an occasional fire to clear the deadwood, the economy requires recessions to clear the damage done during mad times. People need to be reminded that there are sometimes bad times and that they should prepare for them by saving and not taking debt like there is no tomorrow. If the forest fire is avoided for a long time, finally there is so much deadwood that the potential fire would be devastating.

I think the positive long-term scenario is a short and painful crisis that would lead to another wave of growth. Compare Argentina and Japan. Artificial soft-landing is nothing to be cheered.

CR, I really enjoy this blog and it's commentators opinions.

I believe that the reason for the "stickiness" of price declines is due to the complacency of the real estate run-up and out of control debt situation's effect on the economy (complacency is rampant; stock market..look at the VIX). Even the most bearish commentators on the housing market are looking for a mere 10-20% drop in housing prices (after most areas up 90-200% in 6 years). I think most will agree that the financially challenged individuals who took out exotic mortgages with no money down and rampant speculators will obviously get crushed in the coming downturn.

The complacency that seems to be overlooked is to be found with the majority of the real estate speculators who bought before the 2005 peak (1999-2005). Almost all buyers before that time have seen their investments more than double in value. To them a 10% correction is a drop in the bucket. I believe they, as well as many others that have missed the opportunity and want to buy homes as an investment, believe that after the 10% correction has run its course (in the next year or two), the housing market will resume it's bull run and make new highs.
That is what I am sensing from even the most bearish on real estate. A quick, or slow decline of modest proprotions...and then we're off to the races again!!! No, long term impact.

On a historical basis, one must realize that it takes YEARS, many YEARS for real estate to bottom and then move up again. Since 1800, it's usually an 18-20 year cycle from one peak to the next. That was under normal conditions; no exotic debt instruments, 20% down mortgages (what happened to those?), affordability.

If this is indeed a "Bubble", which I'm completely convinced it is (due to the underlying CREDIT bubble), it will take years if not decades to achieve the highs that were made in 2005 (if ever). The problem with bubbles is that it takes a long time to repair the damage. Since this real estate cycle brought one of the largest price expansions ever, it only makes sense that the corrective cycle will be equally as long and painful on the way down.

Look for an alternating slow drip and large swings down for many years. Coupled with the extremely poor balance sheet of the U.S. homeowner, retiring baby boomers (selling their homes to fund their retirements, due to no savings), and rampant speculation, the next decade is going to be very tough for those with too much house.

The Nasdaq (Bubble) hasn't even recovered half of what it was at it's high. If the housing market is also a true "bubble" we can see the same results for that market as well (why shouldn't we), and it will effect a much larger percentage of the population...don't say that one market is different than another...A BUBBLE IS A BUBBLE!!!

Bottom line, those with 1-3 year time horizons for a housing bottom should do more homework on real estate cycles and the bursting of bubbles.

Am I mi

I am very skeptical of any of the published numbers on median sales prices and OFHEO. These "official" numbers do not seem to reflect what professionals in the market place actually see.

Why do new home sales count when they go into escrow and not when they close. Why do they not back out cancellations? Why does price include fully upgraded and furnished units with a pool and mortgage discount?

These numbers are similar to the way the US Government calculates CPI; manipulating it by excluding housing and energy. We all know prices have increased by greater than 2.5% a year over the last 5 years. And it is not just medical care, houses, energy bills or tuition. Go buy a martini or pair of jeans or movie theater ticket.

Once people start qustioning these "official" statistics we will all be better off.

Look back to the housing recession of the early l990's. Everyone knows prices fell 30-50% from their peak, but the statistics don't show it.

In addition, the price diminution never includes the home improvements the tenant made let alone the carrying costs including taxes, insurance and mortgage.

Hypothetically if a seller has a 10% loss no one ever adds on the above carrying costs. Nor do they mention the selling cost including 4-6% broker fees, title insurance, and escrow costs.

Assuming a buyer put down 20% and had a 10% loss plus costs. The actual loss is approximately 75% of the down payment.

And we now know that the 80% loan had a silent second for 100% financing.

statesman.com

To a great extent I ignore the noise/statistics on sales price. I look at inventory, sales and defaults.

I beleive that defaults in California will exceed 160,000 and be closer to 200,000 for 2007. The number of defaults for the first half of 2006 was 40,000. The 3Q was 26,000. October and November of 2006 was 29,000. So we will easily surpass 42,000 for 4Q 2006. The slope of this curve will continue to increase and we will witness the largest number of defaults in modern history.

This should come as no surprise given all the subprime and ALT A loans as well as serial refi's, seconds and HELOC's.

We will return to the era of mailing in the keys.

The subprime lenders will continue to fold. These lenders work on very thin margins and are incredibly levered with no capital requirements. When the bad loans they originated are returned, the institution does not have the equity to repurchase them.

Ownit seeks bankruptcy protection - Los Angeles Times

The lenders to these subprime originators are pulling in their financing. Constriction of credit ALWAYS impact price.

The fraud and misrepresentations of the borrowers is only superceded by the lenders selling into the secondary market.

Rising defaults, increasing inventory, lower sales volume and constricted financing will mandate signigic

Since the CREDIT BUBBLE started the myriad of other bubbles around the world (including US RE bubble) we should focus on it first and foremost. The inflating credit bubble pushed the prices of all the asset classes up and it will be a deflation of this bubble that will bring the assets prices down to earth. With a thud I should add.

I already posted this on Russ's site:

Winter (Economic and Market) Watch » Foreclosure Update

kris b wrote:
“New foreclosure data for November is out, California in particular is fading fast. In addition, California home sales were down 22.2% y-o-y during November. They are starting to face easier comparisons. The Unsold Inventory Index rose to 7.4 months, up from October’s 7.2 and the year earlier period’s 3.6 months.”

When the credit and RE mania were in a full swing everybody on the game was busy dividing the loot. Of course, in their maniacal orgy, nobody even contemplated the consequences of the bubbles popping. The players in this Ponzi scheme were preoccupied with financial engineering of myriads of MBS, ABS etc without ever contemplating a possibility of these vehicles defaulting. Now the chickens are starting to come back home to roost. Who will handle the foreclosures when originating bucket shop goes under. Who will take the hit when the mortgage insurer goes out of business? How will the loses be allocated among the MBS, ABS holders? Who will service the mortgages (originating boiler shop is long gone) when they are all upside down, and have negative (amount to be paid to the bond holders is greater then mortgage payments coming in) cash flow? Does anybody have a clue how this extreme mess is going to be untangled? Years of litigation? We might be talking about potential liabilities going into trillions of dollars. Are MBS, ABS and derivative markets going to go into a deep freeze? Is anybody asking these questions or it is merry go around business as usual, untill the bottom falls out and big lender goes under? When will the credit markets wake up and force the spreads higher? Can FCB bail out the entire US housing market by buying GSE paper forever?

Re: deflation

Mish has posted a nice discussion of how and under what circumstances deflation would play out (Blogger: Page not found. My simplified explanation is that if too much credit is extended, the cost of paying the interest will exceed the expansion of the money supply by further extension of credit. This makes perfect sense (to me anyway), but the devil is in the details. It seems reasonable to expect the housing bust will lead to a contraction of consumer credit, but I'm puzzled how long and far expansion can continue elsewhere. It is curios that the markets would run up starting with the onset of mixed, mostly negative economic news, unless it's driven by speculation driven by plentiful, inexpensive, credit. However, other than anecdotal news (e.g. sudden jump in buyouts), I don't know how to assess this.

Possibly we might see a mix of domestic deflation as maxed-out consumers pull back, coupled with inflation of foreign goods as dollar assets get dumped, driving the dollar down. This would be a very bad scenario for central banks worldwide (not to mention everyone else), but may be inevitable if credit has been extended too far, and will be very hard to stop once started (e.g. Japan).

Thinking about this has thus far only left me perplexed and uneasy, but…

Happy New Year!

AJH

(note: I previously posted as AJ, but have added a third initial to avoid confusion with the “other”).

I really bullish about the long term future. I especially like how the productive manufacturing side of the economy has been gutted and replaced with mortgage brokers, real estate agents and Starbucks baristas. The debt induced spending orgy on suv's, granite counter tops, vacation homes, fancy clothing and bling of all type is really an investment for the future.

Apple's Ipod shows just how innovative and productive our economy has become. Who care's about building cars, growing food or manufacturing clothes. We're much better than that. We can sit at the cafe all day sipping coffee and listening to Ipods while we scour the real estate ads looking for the next flip opportunity.

This is a new age. We put our home equity to work so we don't have to. We create bonds, package bonds, rate bonds and then sell them to the stupid Chinese so we can buy more crap. When the crap overwhelms our homes, we put our home equity to work and add a 4 car garage. The more crap we own, the more the valuable it becomes based on the price that the last idiot paid using borrowed money from the Chinese.

As our asset values go higher and higher, we become more productive and innovative. We put the home equity to work on vacations in the south of France and importing fine linen. We are the smartest, most productive economy in the world. What other economy do you know of that enjoys all of these fine things while never having to break a sweat?

I'm very bullish on the long term. In the future, I see nobody having to waste their time going to work. I see everybody driving massive SUV's towing 42 foot boats to their lake house using the home equity money that's working so they don't have to. Work for the the stupid schmucks like the Chinese. We're productive and innovative. Who else could get the Chinese to toil in sweat shops 80 hours per work while we send them paper IOU's in return? This is innovation and productivity that only a smart intelligent society could achieve. No inputs and massive outputs.

The only impediment that I can see to our continued innovation and productivity based wealth creation is the size of all doors in our country. You see, all this leisure while stuffing our faces full of pies, cakes, and bacon has produced people who are too fat. We need to allow immigration of more Mexican laborers who can retrofit all of our door entries. We'll just ask the Asians to buy a few extra of our packaged home equity loans that are doing all of the work so we don't have to so we can give the Mexicans some paper dollars with President's pictures on them so we can have bigger doors. You see how this works? Innovation and productivity man. As superior American intellectuals, we don't have to work. Our houses do all of the work for us!

DaiD:

Who care's about building cars, growing food or manufacturing clothes.

America builds cars, grows food, and makes clothes. In fact, we grow twice as much food as we need, and our heavy equipment, (Class 8 trucks and earthmovers of all sorts), is in high demand globally.

Meanwhile, not even Europe can match the F/A-22 Raptor in terms of design or technology.

The gap between America and the rest of the world may be shrinking, but it still exists.

Who else could get the Chinese to toil in sweat shops 80 hours per week while we send them paper IOU's in return?

Exactly. Pure genius.

Without farm subsidies we would still grow plenty of food.

If every nation abandoned farm subsidies, then abandoning ours would have less impact.

"Prices are sticky on the way down"

Historically speaking perhaps, on a national level. But, this time is much different, with localized bubbles that shot up astronomically, largely due to a bizarre mix of flippers and easy money. At any rate, those that have owned for a long time realize this "value" as an aberration and will gladly take 20% less than peak since they view the peak as nothing more than fantasy anyhow. Even at 20% off peak the windfall will be viewed as phenominal. Then the defaults begin in earnest.

If you chased the market down in SoCA in the early '90s you'll know how "sticky" prices were. They were an illusion and everyone knew it. Brace yourself.