On Tuesday, we told the Housing story using mostly words. Today, we’ll go with an only-pictures review:
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More Mortgage resets are coming:
Chart via At These Levels
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Median Period (Months) Completion to Sale
Last three charts via Northern Trust
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Funny thing: The charts tell pretty much the same story the words did: The housing story is only halfway done, going to get worse as time progresses. We are not anyway near a bottom in Residential Real Estate.
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Sources:
The Forgotten Resets
At These Levels, Friday, May 11. 2007
http://www.attheselevels.com/archives/678-The-Forgotten-Resets.html
All Indicators Point to Continued Weakness in Market for Existing Homes
Asha Bangalore
Northern Trust, May 25, 2007
April New Home Sales – One-Off Fire Sale!
Asha Bangalore
Northern Trust, May 24, 2007
Q1 Case-Shiller Home Price Index
Asha Bangalore
Northern Trust, May 29, 2007
here’s another chart:
http://www.phlx.com/market/advcharts.asp?SYMBOL=HGX
Just as those have meant nothing to the market, this today also means nothing.
Economy Grows by Just 0.6 Percent in the First Quarter
WASHINGTON (AP) — The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6 percent. That was the worst three-month showing in over four years.
pucker up people the lipstick has been applied….
Ciao
MS
Latest OFHEO housing price data just came out. Here’s my write-up, for what it’s worth …
The Office of Federal Housing Enterprise Oversight, or OFHEO, just released its report (PDF link) on house prices in the first quarter. We’ve seen outright DECLINES in other price measures — such as those put out by the Census Bureau (new homes), the National Association of Realtors (existing homes) and S&P/Case-Shiller (existing homes). How did this one differ?
* OFHEO said home prices DID appreciate nationwide in the first quarter. But the 0.45% gain from the fourth quarter was the smallest QOQ gain since Q3 1996 (0.39%) — and down significantly from the 2.23% rate of appreciation in Q1 2006.
* Measured from a year ago, home prices were reportedly up 4.25%. That’s down from a 12.61% gain in Q1 2007. It’s also the lowest YOY rate of appreciation since Q3 1997 (4.12%). The chart above shows how the YOY appreciation rate of U.S. homes has changed over time.
* The highest rates of appreciation occurred in Pacific Northwest and Mountain cities, such as Wenatchee, WA (+25.6%), Salt Lake City, UT (+19.12%), and Grand Junction, CO (+16.82%). The cities that performed the worst were spread throughout high-speculation states like California, Nevada, and Florida (Punta Gorda, FL at -4.57%, Sacramento, CA at -4.41%, Modesto, CA at -4.38%, and Reno-Sparks, NV -3.97%, e.g.) A few cities in Michigan, which has been hit hard by job losses related to the auto industry downturn, also made the list.
All told, 237 of 285 cities tracked by OFHEO showed price gains, while 46 had price declines, and two showed no change in prices. A quarter earlier, OFHEO tracked 282 cities. 256 of those showed price gains, while only 25 had price declines, and one showed no change.
My take: The OFHEO numbers confirm what we’re seeing in other home price indices. Price appreciation rates are coming down fast, with outright declines showing up in more and more areas. I expect OFHEO’s second-quarter figures to look even more subdued, with the first negative quarterly reading since Q4 1994 (which came in at -0.25%).
Two types of housing markets are getting hit the hardest, price-wise:
1) Areas with the most speculation during the boom — These metropolitan areas are suffering because they have tons of speculators who are trying to unload losing investments. That’s sending for-sale inventories through the roof, forcing sellers to cut prices to generate sales. Home price gains in those regions also exceeded income gains by a wide margin. That has left homes largely unaffordable for area residents.
2) Areas with the worst economic fundamentals — They’re experiencing a more “traditional” housing downturn — one driven by rising unemployment, plant closings, increasing foreclosures, and more. If economic growth remains lackluster, we’ll see more metros fall into this category over time.
would someone mind giving a quick guide on what the different types of ARMs are? for instance why are there more option ARMs upcoming?
Real estate markets depend on job prospects and new household formation more than any other factors.
Given steady job prospects, find the rate of household formations and you will find the base rate of increased demand for new housing.
If the building of new housing exceeds that rate we will have a cooling off period as the excess supply is absorbed.
That is what has happened. It is not a pricing problem it is an oversupply problem.
I’ve been investing in RE for fourty years and this is nothing new. What was new was the thinking that anyone could just buy a house and be above water within a few months. That is unreasonable. Real estate transaction costs are so high that it usually takes several years before appreciation can cover the costs and provide a profit to a homeowner.
That said, it is times like these that are the best times to buy real estate. Don’t plunge in and buy just anything – but instead of renting if you find the perfect home in the perfect location then BUY IY. You will not be sorry.
CK-
Take a stab at that question…
There are more option arms ready to re-set because those were used to get people into houses at the most basic of costs as well as having the “option” to choose a payment. You could pay a neg amortization, straight payment that does’nt get aaplied to principle (unless you specify), or positive amort. (which pays down interest and principle)
The reason so many neg ams were used is that it requires very little upfront and allows the freedon to choose payments. They work great in an environment of full disclosure (for both sides), and a stagnant or in an environmnet of lowering interest rates.
They are very dangerous if the sentiment is for rising rates (my opinion is that they will rise) since the people that are in them tend to be stretched very thin at the point of just making the neg am. payment with a fixed rate. When the rate is adjusted upwards and the person cannot re-fi (fee issues or rising rates)they are stuck with a payment that continues to rise, while the asset they are paying on continues to drop.
It’s a recipe for diaster for the people who are in them and are unaware. At some point in the future-real estate will be a great buy but at this point the growing inventory will negate that rise simply based on supply and demand. Unless of course Hank Paulsen says that the bottom is in……..so he can be the next person to call a bottom on the housing market for the 9th straight month.
Ciao
MS
Times like these are not the best for buying real estate. All the data suggests that house prices will be falling for the next several years. Times like these are when you sit tight and build up your cash pile so that you can buy when the signs of a bottom show up. About 1-1.5 years ago was the time to sell all your investment property, and possibly the house you live in (depending on local market conditions and how much you are willing to pay to avoid renting). If you didn’t dump your investment properties last year, be prepared to lose money on them.
This is the biggest overinvestment in housing this country has ever seen. It will not be over this year or next year. Real house prices won’t be going up much before this decade ends. Any investment that beats inflation will be a better use of money than buying a house (but watch out for overvalued financial assets and bonds backed by houses). Money market funds and accounts are paying over 5% and are safe and liquid if you want to be ready when the market shows signs of a bottom.
The housing market moves slowly, so it is easier to time. You can be off by almost a year and still get most of the profits.
Given the story the charts above tell, it’s surprising that the stocks of the homebuilders have barely budged. PE ratios are soaring and book values are dropping, but the market isn’t concerned, at least yet.
Here are the prices on 5/30/06 and 5/30/07, with percentage change for the last 52 weeks.
TOL: 28.23 to 29.84, UP 5.7%
MDC: 53.80 to 54.59, UP 1.6%
CTX: 48.57 to 48.66, UP .2%
LEN: 47.82 to 46.15, DOWN 3.5%
KBH: 51.59 to 46.66, DOWN 9.5%
DHI: 26.42 to 23.37, DOWN 11.5%
PHM: 32.66 to 27.43, DOWN 16.0%
and comparted to the lows most of these stocks set last July, many are up significantly. Go figure.
“That is what has happened. It is not a pricing problem it is an oversupply problem.”
No, it is an oversupply problem due to a pricing problem which is due to nationwide speculation.
“It is not a pricing problem it is an oversupply problem.”
Eh? An oversupply problem IS a pricing problem. Lower the price enough, and you’ll see the households get formed.
Let me explain to those of you who understand real estate from a acedemic perspective instead of from what actually happens.
Firstly, buying real estate is NOT like buying shares of IBM. Each and every house or piece of property is unique and comparable to others like it only in the roughest sense. But this rough comparison is all we have so it is what we go by. That is what makes real estate so interesting. It is an imperfectly priced market with no two items truly substitutable for each other. For example, you can buy a secondary issue of IBM and have exactly the same stock as you would have if you had bought IBM before the secondary issue. Not so with housing. A small shack in a beach city of California cannot be compared for valuation purposes with a huge mansion in a new subdivision of Dallas or a cookie cutter condo in Florida.
The first principle of real estate valuation is location.
And even within locations the valuations swing wildly from one person to the next.
So while those of you who say that now is not the time to buy real estate you are right only if you are in the position of buying the entire real estate market. But it doesn’t happen like that.
Every house is unique. Every location is unique.
If you come across the perfect house in the perfect location and you do not buy it that particular chance will most likely be gone forever. I know, cause that has happened to me plenty of times over the last four decades.
I have made some pretty good RE purchases but I have missed far more good buys than I have made. Someone always buys them. If that someone is you then congradulations. But if you let too many get away then I can tell you from experience you will regret it later.
The person who makes the perfect purchase today is taking no chances on the market. He has exactly what he wants and he has the house that will be in greatest demand when others realize their mistake in not jumping in ahead of him to buy it first.
To clarify a bit, I am not suggesting that now is the best time to buy the generic idea of a house. Instead, it is a good time to do the hard work and research required to buy that unique house that has all those specific characteristics that are always in demand above other more generic characteristics.
While others are lazily awaiting for others to prop up the market it is the best time to make money by going to work and finding and buying what others will most want when they realize it will be ‘safe’ to buy something. Then you are the one who plays the waiting game by not selling it to them.
This works all the time.
Are you all suggesting there’s a problem with real estate? Where have I been? This is great stuff.
Are people blind? Have they looked around the cities they live in? Has anyone ever seen the amount of building going in there entire lifetime? We doubled the amount of mortgage debt from 2002. Thats right from 7 trillion to 14 trillion. We can thank the reckless balloon head fed for that. Is it going to go from 14 trillion to 28 trillion by 2012. Anyone who doesn’t understand that we are powering growth through excessive credit and debt in insane. The unfortunate problem is that interest rates should be much higher, but the genius cb’s around the world think that they continue this recycling game forever. Now debt growth slack is being made up by the corporate sector. No one knows when it stops, but it will and it will be thirty years in the making.
1. It is a pricing problem. Current housing prices are artificially inflated, due to the ridiculous amount of credit available in the past few years. Housing should have receeded 2-3 yrs ago, but was propped up by loose credit standards and the availability of 100% no-doc neg am I/O loans to anyone with a heartbeat. Now it is time to pay the piper.
2. It is still too early to buy…no panic yet. Give it 6 months or so. Read some of the credit and RE boards and you’ll see why: people who had been qualifying for the abovementioned ridiculous loans are either getting them pulled before closing, or being denied outright now. In essence, the market has had its legs knocked out from under it. Give it awhile to percolate upwards.
3. A picture says a thousand words? These pictures say one word: PAIN
Housing Weak, Nonresidential Construction Strong
Here’s a tale of two construction sectors. First, we all know housing sucks: Non-residential construction, though, is booming. Now for a lesson: look carefully at the scales. (You should be doing this every time you see a chart, or else
“It is an imperfectly priced market with no two items truly substitutable for each other”
And that’s why the best home price measures compare the selling price of the same house at different dates. I’m not sure investing without regard to prices is a great idea as long as your subjective take on perfection says “yes”. The NASDAQ “felt” like a good deal to a lot of people after losing 20% though it was nowhere near sane valuation.
And Mr. Obvious, it’s obvious that Barry isn’t arguing for the existence of a housing slump; he’s arguing that the extent is more that most are willing to admit. And so far he’s been spot on.
Everyday I wake up in the morning and ask myself if I am making a mistake by not consuming well beyond my means because a lot of people are. Is there ever payback time or can debt be taken in ever increasing does forever?
Uncle Anon – your approach may be appropriate for someone with a very long time horizon, very deep pockets, and a very high tolerance for interim losses. OTOH, you’ve been around long enough to know that this can get a whole lot worse before it gets better, and marginal holders can get killed in the interim.
Shrek – “Is there ever payback time or can debt be taken in ever increasing does forever”.
In theory, debt (as expressed in fiat currency) can expand forever and without bound. Of course, in theory, communism works.
Speaking of debt, from Bloomberg in an article asserting the faulty reliance on agency ratings of structured finance:
“U.S. banks have invested as much as 10 percent of their assets in CDOs, and the OCC requires that all of those CDOs be investment grade, says Kathryn Dick, deputy comptroller for credit and market risk. “We rely on the rating agencies to provide a rating,” she says.”
That may help explain how banks keep margins and earnings up in a hostile rate curve environment. The subprime dreck is buried so deep in these products that the banks may not know themselves what their exposure is. They won’t see it until the agencies re-rate, and that won’t happen until the actual loss experience is determined. In other words, after the bank management have cashed their bonus checks.
It’s always a great time to buy.
Housing always goes up.
People don’t buy houses like they buy stocks.
There is no housing bubble.
My city/town/neighborhood won’t be affected because it’s different here.
If there was going to be a recession/depression/hyperinflation/cheeseburger shortage, it would have happened by now.
The stock market is hitting new highs, what could be wrong?
Sample. Loop. Play on each key up the keyboard in quick succession. It gets even funnier about an octave above the original pitch.
Estrogon, I think people here are looking for painless profit. It mostly doesn’t work that way in real estate. There are unique periods of time when you could buy anything and flip it for a profit. But those times are truly few and far between. The transaction costs on real estate are very high. So high that, in normal times, it usually takes several years before a homeowner can recover cost or make a small profit when selling.
Those who don’t have long time horizens and a willingness to sacrifice should probably wait for the start of another bubble before buying. But that won’t be for another ten or fifteen years down the road. In the mean time those with long time horizens and the willingness to take risks and sacrifice will be buying up all the good real estate. When those too afraid to buy now are ready to take the plunge all that will left will be overpriced cookie cutter condos.
Instead of waiting what people should be doing right now is looking for the perfect home to buy. This means avoiding new developments and looking in older neighborhoods. It is a lot of work and takes a lot of time but the rewards are beyond measure.
It seems a lot of people believe that real estate prices must fall as those who bought housing using creative financing of one sort or another give up their homes and put them on the market for resale.
This is not going to happen to the extent they think it is going to happen.
Look. Traditionally real estate purchase, or investing, required the buyer to make significant sacrifice BEFORE they bought a house. Granted, creative financing allowed many people to buy a house without the same degree of sacrifice. BUT what you have to understand that once in a home a homeowner has a vested interest that borders on mania to keep from losing that home if losing it means going back to renting.
So the sacrifice will come after they are already in a home instead of before they buy one.
A much smaller percent of people will lose their homes to foreclosure due to mortgage resets etc. than many of you think as most borrowers will find a way to keep their homes.
As a non-RE investor (wish I was, but I’m just eeking by now) what would the consensus predict for the following situation:
Bought a starter home 5 years ago. My eldest child will be starting school in less than 2 years and I definitely need to switch school districts before then. As for starter homes how does anyone see them loosing value vs. the next step up? Ideally I’d love to hear that the answer is starter homes barely go down in value vs. the next step up which will take a beating. This is in the Minneapolis market.
While there is no question the pricing stats are crazy, don’t dismiss UncleAnon’s larger points. Location/quality still matters.
I live in a very popular suburb of DC with some of the nation’s best schools. Houses in good locations still sell quickly–what I can’t tell you is what price concessions are being made. The marginal properties still have big problems.
I think the wild card/second shoe to drop is interest rates. Don’t forget, this whole blowup occurred with FLAT to DOWN mortgage rates on the long end! 50-75 basis points up on mortgages will not be pretty if it happens.
BTW, MAKE SURE you read the referenced Bloomberg article!!!! Really great stuff….Kudos to them.
UncleAnon,
Your words make much sense, and all things being equal you would be correct.
Here’s why you’re not, In My Never-Humble Opinion (IMNHO).
1) Three trillion dollars was extracted from residential RE equity and turned into stuff: steak dinners, haircuts, guitar lessons, SUVs, cruises, college educations. While things like cars are considered “durable” goods, all of those items are actually perisshables when considered next to the lifespan of a properly maintained home. This is a massive overhang of debt on RE, and it’s only accounting for MEW debt.
2) Demand begets supply. Everywhere that they can build houses, they’re building them. Mushrooms are taking notes on how fast these subdivisions spring up.
3) Have you looked at credit card debt since the housing ATM ran out of money? It’s growing. A lot.
4) This is the kicker: the housing/credit bubble was blown as a way to avoid paying the piper for the Y2K equity crash. In recent prior times of housing boom/bust, we weren’t also dealing with the aftereffects of the extreme transfer (not destruction!) of wealth, away from the middle and upper-middle classes and into the billionares’ pockets, that occured seven years ago.
You are correct in that housing is not equities. But consider that it is a lot harder for people to come up with the funds needed to buy a house than it is for them to come up with the funds needed to invest in equities. Considering that the general public is nursing a double ASSet-kicking, first in their retirement accounts and then in their homes, all the while watching the billionares export their jobs by the metric ton, what in the world makes you think there’s enough of a wealth base out there to support home prices? Because one supreme factor IS the same from RE to equities: simple short-term supply and demand. And I fail to see how there can be enough demand in the short term to cause RE to bottom any time soon.
Debt-wise, the American people are racked, stacked and maxed. They’re about to get whacked (a la Tony Sporano).
I’m open to a good, factual account of why I’m wrong. It would be a happier future to contemplate than the one my lying eyes are showing me right now.
montaigne – I think the current boom has been driven primarily by two things:
1. Generationally low mortgage rates combined with “innovation” in laying off credit/duration/counterparty risk.
2. A pickup in household formation brought about, in part, by the baby boom echo generation reaching maturity.
If this thesis is correct, and assuming these factors have peaked (or will soon), and further assuming the business cycle hasn’t been repealed, the starter home market may be disproportionately affected.
Depending on where the starter is located though, there may be mitigating factors. For example, I suspect boomers will tend to downsize and age in place (not all move to Florida). They’ll probably look for bungalows in decent areas close to services such as public transit.
You mentioned “barely scraping by”. This suggests that trying to front run echo boomers will be risky for you, especially if rates spike. If I were in your shoes, I’d at least run the numbers on rent vs buy.
If the recent housing prices increase is a function of looser credit and inflation, why should prices ever decrease? Looser credit can sometimes be the result of structural shifts that entail a correct revaluation of the riskiness of the lending. Price rises due to inflation are kind of sticky. Maybe this is all going to turn out to be the financial markets way to suck up all that generational wealth transfer coming towards the boomers.
And thats why I hate foreign cb’s. Only the private sector can allocate capital in an eficient manner. People take risks with there own money. The more government meddling the worse things become. Right now the markets are being planned. Yes, the planning could go wrong, but thats whats going on. There is no private sector demand for treasuries at these prices, yet the retards who we trade with are determined to prevent adjustments from taking place. The ROW has no growth model. Its simply export, export, export and make sure your currency is even weaker than the dollar to continue the game. If stocks were rallying and the ROW was actually allowing a floating exhange rate system I would be much more bullish. Watch EM get clobbered this summer. The world threw away the easier adjustment period a couple of years ago. This whole system deserves to get clobbered.
And thats why I hate foreign cb’s. Only the private sector can allocate capital in an eficient manner. People take risks with there own money. The more government meddling the worse things become. Right now the markets are being planned. Yes, the planning could go wrong, but thats whats going on. There is no private sector demand for treasuries at these prices, yet the retards who we trade with are determined to prevent adjustments from taking place. The ROW has no growth model. Its simply export, export, export and make sure your currency is even weaker than the dollar to continue the game. If stocks were rallying and the ROW was actually allowing a floating exhange rate system I would be much more bullish. Watch EM get clobbered this summer. The world threw away the easier adjustment period a couple of years ago. This whole system deserves to get clobbered.
http://www.contraryinvestor.com/2007archives/mojan07.htm
The real bubble isn’t real estate…or China stocks….it’s DEBT. This is how I know:
“Everyday I wake up in the morning and ask myself if I am making a mistake by not consuming well beyond my means because a lot of people are. Is there ever payback time or can debt be taken in ever increasing does forever?”
When (presumably) intelligent people start thinking this way, it is clear that the debt bubble is a-gettin’ rather ripe.
BTW, the answer – there is payback time. And, the more people who wonder if there is, the harder that payback will be…a government bailout notwithstanding.
john-
i’m not sure i agree with you, simply because you are underestimating the typical american’s capacity for debt.
yes, debt is at an all time high, but what else is new? this has been a problem for decades. americans have learned to juggle debt like no one’s business.
as you pointed out, credit card usage is going up, and will continue to go up… the american consumer is beaten and sick, but a sick & beaten person can still spend. maybe not as much, but they will still spend.
remember, housing was a big drag on GDP, but the consumer was still spending…
and also, wealth isn’t necessary to support real estate prices. americans didn’t start buying homes b/c they had pent up wealth. as you said, they lost a TON of wealth after the crash. so using lack of wealth or excessive debt doesn’t strike me as a legitimate argument for suppressing demand.
instead, the reason for the real estate boom was based on a *restructuring* of debt through:
1) low interest rates
2) financial innovations that allowed more risk taking and a liberalization of credit.
the low interest rates are a thing of the past, and are affecting the markets.
but the financial innovation and high risk taking are still there to support this. subprime has contracted easy credit, but credit is still relatively cheap. 40 yr mortgages are probably going to get common.
i think prices SHOULD collapse, but because of (relatively) easy credit, and financial innovation & risk taking they will fall less than they should.
“But as we saw above, the 1980s/90s/00s have shown that monetary debt creation has manifested in inflation in asset markets, NOT the general economy. Thus, creating money out of thin air has created higher nominal stock prices as that’s where the money is going because of the incented speculation on the part of corporations and consumers. Thus, he is really arguing that we should create more government debt because higher debt levels lead to higher nominal stock prices. Nominal being the key word (you know the argument already that REAL stock prices are 25-50% less than in 2000).
A few things he never mentions are: the widening gap between rich and poor that is itself a a function of debt creation; nor does he mention the larger and more disruptive shocks the economy has felt as a result of explosive debt creation over the last four decades; nor the growth of the government as a percentage of GDP. All of these things are demonstrably bad (read history) and they are all fueled by debt creation.”- Minyanville
John, I don’t think I can give you any persuave by the numbers argument why you are wrong about real estate in general.
What I can give you is a persuasive argument about why you are wrong about a real estate property in particular.
Think about where you most want to live and think about the single most desirable property in that neighborhood. Your choice must be reasonable in proportion to your resources but don’t rule out properties that would require you to sacrifice and stretch to buy. If it doesn’t come readily to mind you might have to spend several months researching the issue. Chances are that property is not for sale. Too bad. What is the next most desirable? And the next. Keep going until you have list of the most desirable properities currently available for sale and reasonably priced according to your current situation.
Don’t start by limiting yourself to what is available on the current multiple listing. Start your research independently by selecting first the most desirable neighborhoods and the most desirable features and characteristics of housing in those neighborhoods.
Now here is the thing. Regardless of all the factors you pointed out above and asked me to respond to none of these homes are likely to available to you again in the future if you don’t buy one of them while they are for sale today.
If you wait for the real estate market to improve and prices to start going up what will be available to you will be second and third tier desirables. The first tier will be long gone.
‘Today’ can mean one week or one year but when these most desirable properties sell they will not be available to you again within any reasonable time frame. The people who jump in and buy them before you do intend to hold onto them and enjoy them for themselves and their families.
We are back to a more normal real estate market where it is no longer possible to buy something and expect it to be able to sell it for a profit right away. That is what today’s smart buyers understand.
Ignore the general statistics and focus on the local conditions. Values in your location are typically not affected by values anywhere else in the world. If you are in an area hurt by overbuilding then waste no time or effort in following my advice. You want to be the one to buy the premier property not someone who just admires anothers foresight in buying it. If you are in an area not so fortunate you still have an opportunity to buy something decent it just might take more effort.
Estragon,
Thanks for the reply. What do you mean by Echo boomers?
By eeking by, I mean that do put away 10% of gross earnings, but there’s nothing really left after that to save for the next step up in house.
As for the talk of wealth transfer, I’m 28 and I have to say that everyone my age (say 25-33) is bemoaning the prices of everything. We’re getting killed and feel the squeeze. How we’re supposed to support the boomers’ retirment, I don’t know. Ex: in my suburb the median home value in 1998 was $100k in 2006 it was $240k. These are starter homes. So any young person who bought a house pre-1998 is sitting pretty with a modest mortgage. Anyone buying post 1998 is incremently in worse shape the closer to 2006 they got in buying their house.
Still, if the start homes drop (prices 175-225), wouldn’t they hit a floor sooner than say those houses that are the next step up 230-299? Since I’m younger I have no experience with the bust side of RE.
Get Set For the Great Real Estate Recession of ’08
It’s going to get bad … then it’s going to get worse. I hope people realize this means more than just whether they can get the asking price for their house. The American economy has been running on real estate
UncleAnon,
Much of what you say is established real estate gospel, and some is probably true… but I personally think you are badly miss-estimating the time and depth of what we are just now moving into. It will be years before we are at a ‘bottom’ and probably at least 5 or 6 years until things start back up. (And that word is ‘start’). In the meantime, real values of housing will go way down and those bargains you think will never come again will come again, and at good prices.
montaigne – Echo boomers are the kids of the baby boomers.
The peak of the baby boomers are late 40’s early 50’s. Their kids are around your age.
As the peak of the boomers were forming households, house prices (and inflation generally) were peaking also. The “echo” of that is what, in part, drove the recent housing boom.
The age cohort behind you is smaller (though not as much smaller as the cohort behind the boomers). That means that, all else equal, there are likely to be fewer household formations creating demand for your starter home.
Not to scare you, but starter homes can show nasty price drops. A lot depends on the neighborhood. If a decline gets started, what sometimes happens is folks like UncleAnon buy the houses as investment (rental) properties, hoping to cash in when prices recover. Renters tend not to care for houses as carefully as owner/occupiers, and the investors usually want to minimize cash outlays.
If that cycle gets going, watch out. I’ve seen prices drop to the point where the house is worth less than the price of putting a new roof on it.
Wally, I don’t agree with you that what I am saying is anything close to ‘established real estate gospel’, at least as I see it judging from what I read in places like this.
I think what is established gospel today is that you have a absolute right to buy real estate and be entitled to immediately sell it for a profit.
And it is because this most basic tenant of the faith is no longer seen as true that so many people here see nothing but doom and gloom in the entire real estate market for as far into the future as one can predict.
But the truth of the matter is that real estate investing has just returned back to normal.
The first rule is that real estate investing takes a huge commitment. The transaction costs alone make it impossible in normal times to turn a profit for years after buying a property. Then the maintenence costs kick in, plus real estate taxes, and higher utility costs.
In normal times most homeowners, and real estate investors, are way underwater on their homes and will lose substantial amounts of money if they sell the home within a year, or two or three.
But most people here think otherwise. They think it is a passive investment like investing in a stock. NOTHING can be further from the truth and if someone buys property on that assumption they will surely lose money, as they should.
And the second, third and fourth rules are, in order: Location, Location, Location.
Those people who think that the average price of homes in the United States, or what happens in the Florida condo market, should have an effect on their decisions to buy or not will yield the field to those who know better.
But because so many people feel that way it is a great time to put in the effort required to find the most perfect property to buy.
And in my opinion, conditions are such that this is no time to settle for some wretchedly crowded homestead in a hugely overbuilt suburb fifty miles out from all decent amenities. Those are the mistakes. The newest devolopment are usually on the least desirable land. The best locations always get taken first. So stay away from them. Focus on the better neighborhoods in town or closer to it and do your homework.
Real estate will always be profitable for those with the commitment and the willingness to do the research and make the effort to find and buy the best values.
Estragon you are wrong in regards to Echo boomers. You use the media phrase that coins them as a small rippple of a larger wave. Echo boomers have only started to appear into their 20’s and they are the start of a larger wave coming. Static charts do not show the full effect of what is to come. the baby boomer generation is grew in size through the 1970-1990s and in the next 10 to 20 years will start to deteriorate as deaths start to outweigh immigration.
http://www.sightline.org/images/blog2006/washington-population-age-structure-1980-2005
The echo boomer population that is in its late teens to early 20s is still growing in numbers and will surpass the size of the original baby boomer generation in 2020 and will still have 20 more years before their deaths surpass immigration rates. Populations are still cycling up in this country even though momentum of the upcycles are slowing. Its not the percentage of a population a generation is, its about total population and it continues to go up in the US. You will be lucky to see a time when the population recedes.
You should also note that more people are living past 80 now than ever before. They aren’t dying off as quickly as in the past. That means they are hanging around longer and will not be passing on their homes as soon as everyone expects them to. After all most people will want to have a play to live when they are 80 and 90.
Here Barringo… I got’cho Case-Shiller and yo housin’ graph right here (graph it). BTW, you can graph it on your left hand.
*3-5-7-5-4*
RE is not liquid and the ponzi scheme suckers are about to figure this out. The epicenters of the housing bubble, Phoenix and Vegas, are not known as epicenters of brilliance. Quick buck artists run amuck here, is it any wonder that these two locatations will epitomize the RE crash?
Those who thought they would ride the gravy train and got greedy will now pay for it via foreclosure and bankruptcy.
These types of scenarios (speculative credit fueled bubbles)have played themselves out time and time again. The only difference this time is that the “american dream” of owning a home is going to turn into a nightmare.
Is it different here?
That’s a really interesting question. I know that there have been local busts amongst national normalcy, but what happens to the stronger locations during a national bust? Are there any reviews of what happened to various Metro areas and rural home prices during the last national hiccup? How many areas escaped damage?
Ignore the general statistics and focus on the local conditions. Values in your location are typically not affected by values anywhere else in the world.
In my county (Monterey, CA) entry level garbage goes for $600K in slums where household incomes are $45K. In my county there are many buyers who will have to pay $4,000 per month after ARM reset when they gross $3,000 per month. In my county inventory has gone from <1,000 units to >2,500 units in 18 months. In my county sales prices run 10% below asking prices. In my county there is zero demand from out of town buyers (the lifeblood of the area) due to retirees getting locked in their old houses because they can’t sell.
I’ll wait 3-4 years for some long term owners to die off, then buy the “prime” real estate while there’s still low demand. The conventional wisdom of RE does not apply…
UncleAnon,
You must be living in a different century from the rest of us. The house I live in was one of about 100 identical houses on my street when it was built. It was one of at least 500 identical houses within a 4 block radius when it was built. There probably hasn’t been a single year that has gone by without at least 5 of these houses being on the housing market since they were built. It is true that over the past 120 years the different owners have modified them in different ways, but not enough to make them substantially different. The differences are small things like whether the front porch is closed in and how much the original woodwork has been left or replaced. They all have the same number and size of rooms and bathrooms. If you think one of them is perfect, you will be very happy with almost any of them (the exceptions being the ones that weren’t maintained very well).
This is not some strange anomaly where I live. This is how houses have been built for over 100 years in this country. Houses are not as unique as you seem to think they are.
If you are unwilling to compromise on anything and insist that there is a perfect house for you and everything else is inferior, you are going to lose money in housing. The top three things people care about in houses are location, number of bedrooms, and number of bathrooms. There are very few people who care about location more specifically than by neighborhood, and most people are happy in several neighborhoods. A house that you will be happy with is on the market all the time.
This may not be true in small towns, because the total number of homes on the market can be very small (although I would think the variation in location quality is also smaller). But it is probably true for any town/city with a population over 50k.
jkw
John, I suspect you are not the only person with that plan.
The problem is that those people who get in ahead of you are not going to be selling to you in three or four years. They are going to be watching you pay more for less of a house instead.
And John, you can search the planet and you will find there is only one Monterey California. That is why tiny shacks start at 600k.
If you want to see what the future has in store for Monterey go down the road a bit to Santa Barbara. You cannot buy a parking spot in SB for 600k.
The world has only one California coast.
Buy it while you can.
okay, ipfreelee and estragon, which is the true story, and if there are more people that are going to be buying starter homes or even the same amount, then which way do they go? Fall as fast as the rest or hit a floor while the higher tiers keep tumbling or fall and the higher tiers don’t fall as much (the last one seems unlikely since no one is going to be able to move up the ladder if the bottom section is chopped off. In Minneapolis, there aren’t really any starter homes in good neighborhoods for under $175 and to get something decent you need to pay about $200k (3 bedroom, 1500sq ft.)
Barry, I agree with your sentiment, and maybe you aren’t in the business of answering questions like the one I’m gonna ask you, but I’ll try anyways.
What _would_ a bottoming of the housing recession look like? Is there one indicator that you believe would lead first, or can you name a lagging indicator that might confirm a potential bottom?
It certainly looks like we are not at the bottom based on the data, but what _might_ the data look like if we were to hit a bottom?
“The world has only one California coast.
Buy it while you can.”
Posted by: UncleAnon | May 31, 2007 9:42:42 PM
Remember the Superman movie when Lex Luthor (Gene Hackman) and his goofball sidekick Otis (Ned Beatty) plan on making California fall into the Pacific by causing an explosion in the San Andreas fault? They figured that Nevada would be the best place to buy!
Thanks for your insights UncleAnon, I learned something!
montaigne – ipfreelee is correct in a couple of ways:
1. Echo boomers are a bit younger than you.
2. Fertility rates are about at replacement levels, and immigration should keep overall population growing for some time.
We can’t say if total population will continue growing as the boomers die off. It will depend on immigration (which looks to be headed lower at the moment), and fertility rates (which tend to be significantly higher in immigrants). Anyway, this is an open question, but not relevant to your timeframe.
What we CAN say, is that boomers (defined as being in their 40’s in 2005) were about 4MM more numerous than the next 10yr cohort, and a peak in house prices associated is associated with the boomer cohort. Echo boomers (defined as being between 15 and 25 in 2005) are about 2MM more numerous than the next 10yr cohort.
We can also say that prices have already increased rapidly, and appear to have peaked for the foreseeable future. We can say that lending standards are more likely to tighten for entry level buyers than to loosen over the next two years. We can say that we’re closer to the end of a business cycle than the beginning, and that entry level employees tend to be hit hardest in a slowdown. A two year horizon for a slowdown isn’t unreasonable. We can say that there’s a national level surplus of surburban land in various stages of development which builders are going to want to clear. On current trends, two years isn’t unreasonable for that to clear.
Irrespective of the national demographics though, you need to look at your own local market. In particular, look at rental versus ownership costs (assuming little or no price appreciation). If it’s tilted heavily one way or the other, it’s likely that the prospective buyers of your property will figure it out and act accordingly. Also take a hard look at the area you live in. Is it generally improving (people adding on, painting, planting trees, etc.) or is it showing signs of stress? You mentioned wanting to move school districts. Are your neighbors thinking the same thing?
At the end of the day, nobody can say for sure what will happen with prices. We all roll the dice and hope for the best. Bon Chance.
The problem is that those people who get in ahead of you are not going to be selling to you in three or four years. They are going to be watching you pay more for less of a house instead.
And John, you can search the planet and you will find there is only one Monterey California. That is why tiny shacks start at 600k.
He he, I greatly dislike the foggy Monterey weather and only work here because it’s a job. The costs are high largely because of the anti-growth politics of the wealthy, for there’s lots of undeveloped land.
You are fixated on “ownership” and miss the entire point!
1. I wouldn’t even live in the $600K house neighborhoods! They are dumps! I’d never imagine buying a house there! It is possible to rent for 1/3 the cost of ownership, and rent in a very very nice neighborhood for 1/2 the cost of ghetto house ownership.
2. As the finance market tightens from historical lows, and the subprime lenders disappear, those who bought in the last 3-4 years won’t be able to SELL their current houses so there will be LITTLE competition for a long time. The buyers may find a way to keep their houses, but a golden prison is a prison nonetheless. The $600K ghetto houses were only $250K in 2003, without 100% ARM/Option loans they’ll be $250K again.
3. You are flatly ignoring the price crashes of the CA coastal markets in the 1980s and the 1990s. Same in Hawaii. When the market gets rolling people buy fantasy houses they can’t afford, then a few years later they have to sell them. This time the lending was much easier than in the past.
The bottom line is that it makes a whole lot more sense to diversify away from real estate (invest the difference between rent and ownership–anywhere else) for the next few years. When rent vs. own costs move to the same ballpark then your arguments are basically valid. You are either clueless or a troll, so I’ll move on.
UncleA:
I think you should find a Japanese blog and share your wonderful real estate advice with them. I’m sure they’ll find it illuminating.
J.
Heres the big picture as I see it.
The US economic strength of the past century, was immigrated and raised here by super achievers from foreign lands. The tail end of the century brought us a golden age of supermen artisans who would change the whole situation in the Lords Prayer personna.
We have an aging superstructure, on a vast landscape in a time of oil dependancy / sparsity.
Our schools are doing the best they can in this MSM gigo enviroment. Todays real knowledge is locked up in segmented departments of major corporations, so secrets stay secret. Education is expensive and in this growing global labor world squelches the ability for parents to higher educate their kids. So we are in for a slower period of development.
Add that American taxpayers are the worlds security force. Can we bill the EU and China for our services since Iraqie people are defaulting?
Add that computers / robots are being programmed everyday to obsolete us humans, cause they are cheaper in the long run.
We have a working for the weekend party mentality, and to quote a local dj show opening, “doing as little as possible and still get paid for it because thats the American way.”
Look around at the ideas and gadgets coming hard and fast out of our designers, rehash products of the Audio Visual Age.
Energy and planet saving is our new growth engine but how do you make money supporting those ideals? Old school corps gotta stay in the game, so there will be a struggle.
What does all this have to do with housing? Everything.
IMO we are in for a real housing repricing.
Then again, maybe there is no spoon and we really do have supermen artisans in charge.
Estragon,
Thanks for the follow up.
I think there’s a, IMHO, a fundamental disconnect between UncleAnon and most of the posters here.
I think UncleAnon is speaking about homes. Most of the rest are speaking about houses. It’s the same thing, but seen from a radically different point of view.
The home market, yes, is unique, because every home is unique.
The housing market is quantifiable because it’s macro, as opposed to the home market’s micro.
I think you all are comparing apples to oranges in points of view here.
There is never a bad time to buy a home. There are ALWAYS good and bad times to buy a house.
UncleAnon comes off as an almost stereotypical Realtor trying to talk the market up.
Anon, that may not be your intent, but that’s sure what it sounds like.
I think you’ve probably got about 3-5 years of talking to do, sadly.
I would like to echo the comments of Chris. Most people view their house as a commodity, essentially interchangeable with many others. And for the most part they are right – pick a house in a recently developed subdivision (and in many older areas) with certain defined characteristics (sq ft, # bedrooms, bathrooms) and it is pretty much the same as any other house in a newish subdivision anywhere in the country. Having been to hundreds of open houses it seems for the most part that people really don’t care what their house looks like. As long as it is big enough, the lights work and water comes out of the taps, and the neighborhood isn’t too skanky that’s good enough. And why should they care? For employment reasons, a move in 5-7 years is in the cards anyway. So, the way most people live a house isn’t really a home, but just a place to hang your hat for a while.
UncleAnon I think is talking about something entirely different. He is talking about that small segment of the population who are looking for a home. Then design, materials and neighborhood (location) really matter. And if you buy a home you would rarely want to sell it. In market down-turns like the one we are starting to witness, more houses are on the market that could potentially become homes. For example, in LA county there are several houses (<10) for sale that I find quite interesting, some of which have not been on the market for 40-50 years. Whoever buys them now will likely take them off the market for another 40 or 50 years. So UncleAnon is right: if you don't buy that special house that could become your home, you will never get another chance. And if you get that chance you should take it, because a home after all is essentially priceless.
The world has only one California coast.
Buy it while you can.
Posted by: UncleAnon | May 31, 2007 9:42:42 PM
This is always my favorite logic, because it assumes that prices exist independently of buyers who can pay them.
Right now in the good neighborhoods of the Bay Area, you can’t get sh*t for under $800k, which even in a low-rate environment requires $200k of cash in the bank for a down payment, closing costs and repairs, plus an income north of $150k to sustain. And that’s if you *don’t* want to insure it against earthquakes.
But don’t worry, the Echo Boomers will bail us out! Except they’re downwardly mobile and already up to their eyeballs in education and credit card debt.
There’s no reason why the amazing California coast is somehow worth 2x what it was in 2002. And there’s no reason why it will be worth a dollar more tomorrow in real terms, given that much of that appreciation was fueled by lending standards that no longer exist.
Houses on the Wild Major Market Coasts.
Theres another point. You’all make your money in major markets with international global money and flip your house to the next fast player and move into our slow backwoods world, capturing both your home sweet home and a retirement fund on the flip. Thus inflating our world here, where alot of us have to play our whole lifetime in minor and medium market jobs.
Course its your job out there to maintain our lines for the boss and yours benefit. Thats the Game of Life. Not crying fowl, just complaining. Now I’m gonna get my ass kicked for letting the cat outta the bag.
There’s no reason why the amazing California coast is somehow worth 2x what it was in 2002. And there’s no reason why it will be worth a dollar more tomorrow in real terms, given that much of that appreciation was fueled by lending standards that no longer exist
You are forgetting that much of the primo CA RE has been, and continues to be bought up, by rich foreigers and well-off CA immigrants. Look at Seattle, tremendous demand from Hong Kong immigrants, etc, where the prices make CA/WA look cheap. Globally, CA is not expensive.
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