patrick.net

The term "pre-fabs" refers to a building process, not a type of house. AFAIK, pre-fabs conforms to R1 requirements. The only thing that I am not sure about is the architectural review that is requsite in some cities. Pre-fabs are not to be confused with "manufactured" or "mobile" homes.

West Coaster, I think the proxy assets (both UP and DOWN) will have separate intrinsic values and trading prices. The intrinsic values are controlled by the "data processor" according to a home price index. However, prices are still determined by the market. Participation in the proxy should not directly affect "odds" or payout because it does not affect the index.

"While the real reason, as always, will be the attempt to protect their investment..."

Very true. I also think that most anti-globalization activists worry more about the implications to their own well-being than the effects on the third world "exploitees".

A sound game plan that effectively utilizes a prediction and reacts to any adverse outcome is far more important than the prediction itself.

Jack, I thought your prediction was 10% down over 4 years. The 20% scenario was suggested by Fake P. Am I right?

Statistics can be morphed into anything, including art.

Jack, I thought the median down payment for first time buyers in California is under 4%. It does not matter that move-up buyers will hold on to their properties because a very small turnover is sufficient to move the market.

The only way to maintain buyer quality is to instigate a minimum 20% down payment policy.

Quite sadly, my track record on gloom and doom predictions are quite a bit better than my other predictions.

"I may have said 10 per cent in Marin County, 20 per cent in Bay Area, and much worse in outlying areas, and total hell in Phoenix and Vegas and Florida."

That could have been what you said too. :)

Face Reality, I cannot wait until it is October. Well, I will be either right or wrong. Please do remember my clarification regarding the scope of my prediction though. :)

It is not difficult to have a position. I am not afraid to be wrong and if that is the case I will just react and re-assess.

Of course, the market will not have declined 65% by October. (Check my clarification/disclaimer) :)

Today we celebrate Canada Day with our bubble buddies north of the border. Cheers!

It is very important not to perform single variable analysis.

Some claim that millions will migrate to Sun Belt states in the near future. However, the original forecast was done with the assumption of very low comparative real estate prices in the south. Will people still come in droves when prices are sky high? Time will tell.

Some claim that as long as the economy is good and people can maintain their income house prices will never crash. However, a stagnant home market will put stress on the real estate and home building industry. When our economy is so dependent on them, a slowing market can ruin the economy. Sometimes, cause and effect trade places.

Some claim that people can refinance to pay for mortgage. However, if the market stagnates, no more cash can be extracted. When prices are falling, refinancing will be difficulty if not impossible.

Any premise of a rosy real estate future is supported by even rosier assumptions.

Jack said:

“a 10 to 20 percent decline (at most) in the SF Bay Area over a 4 year period, and a 10 per cent decliine at most in Marin over that same period...
In otherwords, I predict an end to the big run ups, but definitely a
SOFT LANDING (at WORST) for the Bay Area."

That's your definition of a "SOFT LANDING" ????
I'd hate to see your idea of a "moderate fall" (30-50% in real terms?).

Jack, I think you agree with us Bubble-heads a lot more than you may realize. A 10-20% drop in real terms IS a bubble-deflation event, albeit a moderate one by Japanese standards. Statewide, prices here dropped about 21% in real terms (source: CEPR.net) during the early 90's. No one called that a "soft landing" then, or now.

As BA_Renter pointed out, some 43% of the jobs created in the last 4 years have been in housing or housing related sectors. So, even such a modest-sounding drop will have HUGE repercussions on the economy --nationally and statewide.

Since everyone else is anteing up and making predictions, here's mine, for what it's worth (not much): I see the $300 billion of 0-down, I/O & neg-am ARMs adjusting next year, followed by another $Trillion in both 2007 & 2008 as the trigger that eventually pops this sucker, regardless of what the Fed does to short-term rates. Personally, I believe it could take as long or longer than the last bubble to fully deflate (6 years), and those "sticky" prices bottoming anywhere from 30-50% below current levels, which would bring PE and income:price ratios back to their historical averages.

But what do I know?

Face Reality:

To summarize what I just posted for Jack (above), if you think median prices could fall 10% over the next 3 years, then you ARE a bubble-believer by definition. All we're really arguing over is the SIZE and SPEED of the crash, not the crash itself.

A 10% price drop over 3 years is moderate as housing bubbles go, because RE never falls as far or as fast as the stock market when it crashes. It's probably analogous to a 25-30% drop in the stock market in 1 year. I think it will drop further than that, but even 10% in 3 years would be enough to trigger mass foreclosures & panic among over-leveraged buyers, who suddenly find themselves stretched too thin and upside-down equity-wise.

Speculators & FTBs are taking on these crazy 0-down I/O neg-am loans in massive numbers only because they're convinced that prices can only GO UP. Once prices begin to drop, or even level off, I think we'll see a fundamental shift in the psychology among buyers. Once the "bloom is off the rose", we will start the long, slow decline that is the inevitable end to such manias.

No, I too doubt it will be "doomsday" in three years, but median prices eventually reverting back to historical norms (or a bit lower) is a distinct possibility, don't you think?

Everyone,

This is all very simple. No matter what kind of numbers any of us come up with for the "correction", we still don't know what it will be or how long it will take. This is feeling more like a football pool than anything else now. As a matter of fact, let's make a grid and pick some numbers. Whoever picks the right numbers gets to take us all out to dinner! :-)

Here is a fact: The real estate market has always been cyclical....always. If the naysayers stopped to look at history, I don't think that fact can be disputed. If they do dispute it, they are just fooling themselves.

BayQT~

Jack,

The naysayers I was referring to are the ones who don't think there is a bubble.

Fake P,

Is it not the history of the football team's performance and that of the players that gives one an indication, some measure, of what the ending score may be? You've been a pretty good devil's advocate on this blog, but you have to agree with the parallelism.

I quote Fake P:
"I predict that within one year, the housing market will reach a peak and level off. There will be minimal growth after that, but the market will not crash like everyone hoped."

That statement would make you one of the naysayers, correct Fake P?

BayQT~

Fake P>Hey, my point is simply that it is undeniable that there is always a chance that something that happened for the past thousand years might not happen again. So what if the housing market continues to rise for a few more months, and an asteroid hit earth and kill everyone? No more cyclical housing market. At least if everyone died, at least I have owned a home before I die…:p

Fake P,

You are getting really funny now. Arguing for the sake of arguing, are we? ;-) Of course, the NASA spacecraft that is on its way to crash into a comet could backfire somehow and cause a universal catastrophe, but that's not what we are talking about. :-)

BayQT~

heavily ARM'd,

You took the words right out of my mouth. I noticed the same things right away. But I didn't want Fake P to think I was pickin' on him. LOL!

Check this out. I found this posted on housingbubble2 blog:

The 2004 leading interest-only loan purchase markets nationally in percentage:

Fort Walton Beach, Fla. 71%
Athens, Ga. 67%
San Diego 64%
Santa Cruz-Watsonville, Calif. 64%
Santa Rosa, Calif. 61%
Panama City, Fla. 60%
Salinas, Calif. 60%
San Francisco 59%
Reno, Nev. 58%
Oakland, Calif. 57%

Source: LoanPerformance

Very scary numbers. And the ones with 1 year and 3 year interest-only periods are coming due this year and 2007. tsk tsk tsk

BayQT~

ARM'd,

You're welcome.

Here's more news. I have family in Las Vegas so I stay relatively abreast of the changes going on there. A few months ago I read about the cancellation of one of the tower condo projects (Krystal Sands), but another one just bit the dust....Aqua Blue. It's Michael Jordan's new high rise project. I haven't read the whole story yet but here are a couple of links:

http://press.arrivenet.com/bus/article.php/661092.html

http://www.klastv.com/global/story.asp?s=3535951&ClientType=Printable

Krystal Sands is now Turnberry Towers. I saw the site when I was there during the Memorial Day weekend. 1, 2, & 3 bdrm condos, $500K to over $1million. If you want in, all you have to have is a cool $50k deposit.

BayQT~

( I had to take out links because of the "awaiting moderation" message.)

ARM’d,

You’re welcome.

Here’s more news. I have family in Las Vegas so I stay relatively abreast of the changes going on there. A few months ago I read about the cancellation of one of the tower condo projects (Krystal Sands), but another one just bit the dust….Aqua Blue. It’s Michael Jordan’s new high rise project. I haven’t read the whole story yet but here are a couple of links:

(press.arrivenet.com/bus/article/php/661092) add the http:// and .html and you will have the whole link

(www.klastv.com) put Aqua Blue in the search box on the left.

Krystal Sands is now Turnberry Towers. I saw the site when I was there during the Memorial Day weekend. 1, 2, & 3 bdrm condos, $500K to over $1million. If you want in, all you have to have is a cool $50k deposit.

BayQT~

Fake P >People, the increasing use of IO loan does not necessarily mean that the bubble is growing bigger. It could be the case that IO loans made a lot of sense for people, and so it increased in popularity.

Well, DUHHH, of course it increased in popularity. The kool-aid was so cool and refreshing, they couldn't taste the poison. Their minds got all foggy and they couldn't reason for themselves. It made sense for a lot of people because they thought they would be "left behind" in the housing market if they didn't. So what if you do! You just rent. It is NOT the most important thing to do in life. And it is NOT the most intelligent thing to do (take out an I/O loan) if your salary cannot support it.

Whatever happened to using common sense, I'd like to know?? It is REALLY a no-brainer. Betting on the future in this very questionable, very out-of-ordinary, unsustainable, global affecting housing market is not the smartest thing to do...especially not at the peak.

BayQT~

Face Reality >Assuming that all people with ARMs or with IO loans are over-stretched is a gross generalization.

Face....speaking for myself, I try NOT to generalize like that. I may say "a lot of..." or "many", but not "all". Regardless of what you or I may feel, however, doesn't change the fact that there ARE many people getting in trouble over-stretching using these loan products. Now, personally, I've had an ARM back when I bought a house in the 80's....and if I recall correctly, it was a 5/1. The big jump at the end of the 5 years was around $400. It was do-able. The big scary monster option ARMs and I/Os that are happening now, and with some folks thinking that they must go for the bigger house/condo, the added cost once they start paying off the principle is double and triple my little $400. THAT is the scary part.

Granted, there are people who CAN afford the added expense, but there is no denying that there are many who can't. Have you not been reading Patrick's links that document such stories? It is documented that lenders who once offered I/Os to wealthier consumers are now offering to lower income and credit poor buyers. THESE are the people who's eyes are bigger then their stomachs and who will be in trouble. Increased taxes from the inflated "value" of the property can kill whatever plan they thought they had. A lot of people are just not thinking....

BayQT~

From one of Patrick's June links:

Boston Herald
"Experts say the first signs of a bursting housing bubble include falling sales volume, but prices that don't immediately drop - exactly what the latest Massachusetts real estate figures show.
The Massachusetts Association of Realtors reported yesterday that single-family house sales fell 11.1 percent in May - the worst decline in almost three years. But median house-sale prices actually rose 6.2 percent, hitting $359,900.
Economists say this combination - higher prices amid lower sales volume - is precisely what you'd see in a bubble that's dying. "

There are a lot of things to look at when evaluating what the market is doing. One of the things you see in the nightly news is what the median house price is....not so much the change in sales volumes which speaks (pardon the pun) volumes about the changing market.

Quoting Warren Buffet (from MarketWatch article):

Lending practices, low interest rates and herd mentality are "coming together in the real-estate market in a way that would lead me to believe that -- certainly at the high end -- people who buy houses today may have some periods when they regret it....

Ok, so is Warren Buffet talking out of his ass, too?? I think not. He didn't get where he is be saying stupid stuff and doing dumb things. The handwriting is on the wall. As it's been said before, it's not a matter of "if", it's a matter of "when".

Here's another article you can read. It's also from Patrick's list:
http://www.thetrumpet.com/index.php?page=article&id=1561

BayQT~

Absolutely, TWIT....I don't think they are reading the links. That was my point in citing a few of Patrick's links, too.

But you know what? Their arguments aren't good. To them I say, as quote from the movie, A Few Good Men...."You can't handle the truth." :-)

BayQT~

Oh, and have we even talked enough about the "no doc" or "stated income" loans? Now THAT is scary. I'd say both the borrower AND the lender are walking a tight rope in those scenarios. Lenders are throwing hundreds of thousands of dollars at people who can't even show proof that they can pay the money back.

Talk about creative financing.

But I've got a good seat and I'm enjoying my popcorn while this story keeps unfolding.

BayQT~

Hey ARM'd!

I like that Bubble Posse tag. ;-)

BayQT~

Face Reality >Among other things, you may recall that I showed that prices in the major towns of Santa Clara County haven’t really gone up that much since 2000.

I haven't read all of the posts after yours but I beg to differ with you on this, as well. I have a friend who bought a house in Gilroy 8 or 9 years ago in the $200's....they are supposedly valued in the upper $600's now according to the ditech site. Now, if you can get out of that that property is "not going up much", we'll need to sit you down and have a quick math and logic refresher.

ARM'd, you are too much! Baby Got Back. LOL! How long did it take you to get those lyrics together. You SLAY me! :-D

BayQT~

hymie >You make a great point about most of the IOs being in Oakland.

Is that true? ARM's corrected my post with information for 2005, and it turns out that Oakland does NOT have the most I/Os. See heavily ARM's post of July 2nd, 1:39pm. I went to the Loan Performance web site but it's not very user friendly. I couldn't pull up the 2005 numbers myself to post here.

ARM'd? Would you mind posting the 2005 stats from that site? Thanks , homie. :-D

BayQT~

Face > The expansion of 101 from 2 to 4 lanes helped with this, of course.

I sure can agree with you here (see! I'm not picking on you. :-) ) That expansion gave much needed breathing room. Before that, you had to make sure you had your bathroom stop before passing Milpitas. LOL!

Thanks, ARM'd. I was looking for info that would line up Oakland "with" the other cities where people are using I/Os to stretch their incomes. And my point would be that it doesn't really matter where you live in the Bay Area...Oakland or Marin...it's bad all over.

BayQT~

TWIT >Well, gosh, I didn’t think about how the widening of 101 between helped push up the price of housing in the East Bay and Santa Rosa, etc..

In Face's defense, I think he was referring to the lightening up of the traffic flow, thus making some people feel that it was/is a commute they could stomach. And from there they started considering purchasing property out that way. But that would mainly affect the ones who would actually live in the place. For speculators, it would not matter whether the road remained 2 lane or was expanded to the now 4 lane.

At least that's how I understood what he was saying.

BayQT~

Face > How is it global?

I'm just going to give you one link to review to help answer this question. It's from Patrick's link from April 10th

http://www.jenman.com.au/NewsArticles1.php?id=136

BayQT~

Actually, Face, it's much bigger than just the information in that link I cited (how our interest rates are set in global markets, connections to China and Japan, how our dollars are spent, blah, blah..) but someone else can explain more eloquently than I can.

Here's another little tidbit.

http://www.roubiniglobal.com/setser/archives/2005/06/if_there_is_a_g.html

BayQT~

The blog goes on just fine without me... :)

Just come back from Bodega Bay. It is a beautiful place. I did not give too much thought to the housing bubble issue though.

People, the increasing use of IO loan does not necessarily mean that the bubble is growing bigger. It could be the case that IO loans made a lot of sense for people, and so it increased in popularity.

Of course IO loan makes a lot of sense. It allows marginal buyers to get into houses that they cannot otherwise afford.

What about non-marginal buyers? IO loan makes sense because of the flawed assumption that home prices will continue to soar and that these homeowners can trade up within 5 years.

None of the above sounds good to me.

Bingo! Bravo! I hope these bubble heads will come to their senses and not be so extreme. It is sad that these bubble heads see a bubble in anything and everything.

We visited a small town called Occidental. I saw a lot of soap bubbles flying around! :)

That’s indeed a very big jump. Gilroy and Morgan Hill are good examples of areas with a very large population change. The expansion of 101 from 2 to 4 lanes helped with this, of course.

This is classic urban sprawling and is very bad for the environment. Soon enough, the new lanes will be clogged with new traffic.

IMHO, we should designate certain areas inside the Bay Area proper to have higher population density. People should have the option to trade living space for proximity at a given price.

Jack, you can use intangibles to justify practically everything, because they are not tangible. :)

It is quite possible that someone could have justified pets.com by intangibles too. ("I love my pets so much that I bought pets.com even though it is worthless." Of course I did not buy pets.com.)

“250 per cent premium to live here?”

How about the premium of owning versus renting? This should be more stable across the nation, right? Why is there a 250% premium to buy here and only a 100% premium to rent here?

"To summarize: big credit bubble, but bay area survives because wealthier people are replacing those leaving. Rest of america becomes wasteland of economic horror."

I heard that after the Asian Financial Crisis some billionaire real estate tycoon in Thailand had to sell food on the street. The credit bubble is precisely about wealth.

On the other hand, there are perhaps a lot of wealthy people in the Bay Area. But are they going to buy all the 500K homes on the market when the bubble bursts?

Does the “Pets.com” analogy REALLY have anything to do with this conversation Peter?

No, I was just saying that to provoke you.

Peter P, is it totally impossible that there are a lot of people here who are not “wealthy”, but they have some net worth which enables them to buy $500-$1M (but not multi-million dollar) houses with a sane loan? Why do you think that people are either broke or multi-millionaires? Most of the people I know have a net worth of a few hundred thousand dollars, so such people can’t be all that rare…

Face Reality, how many of these semi-wealthy people are going to be net buyers of real estate if the market is expected to stagnate in a "soft landing" scenario?

There were also a lot of semi-wealthy people in Tokyo with significant savings. There were also vultures who circled around Tokyo. Yet they were unable to prevent a large decline in real estate prices there.