patrick.net

One article has the following to say about Las Vegas:

"At the end of May, 15,066 homes were listed for sale, up 1.6 percent from April. The median list price of available units was $359,900, up 1.4 percent from April and up 13.4 percent from May 2004."

Where is the year-over-year inventory number? I heard that it has increased 232% over May 2004!

I am going to Las Vegas next week. Perhaps I can see what is going on there.

Even median selling price is not very representative because it is sensitive to cross-sectional shift in the market.

Y/Y changes in inventory number and time on the market tell a lot more about the shift in sentiment, which is all important in a speculative market.

I think PMI protects the mortgage insurer in case of foreclosure. I doubt that homeowners can get much out of it other than the fact that they would not have been able to get a mortgage without that in the good old days.

Jack, at the very least, this new instrument can take fear out of both homeowners and propective buyers. The result is milder bubbles in the future.

"And the “index” is the bookie. Is that close?"

Yes, absolutely. I hope that it can take speculative pressures from the housing market itself.

We are have a bubble is because the very act of speculation and the effect of that act form a positive feedback loop. An alternative speculative device that is disconnected with the actual housing market should soften the effect.

There are still a lot of unanswered questions regarding the proxy asset itself. I am quite excited personally. It will be at least academically interesting.

Hellboy, if I am a speculator, I would just buy an "UP" MACRO to participate in any price gain? It will be a lot cheaper with much better liquidity and it is also easier to diversity.

RISmedia?

Soon they are going to say thet renters will be drafted and sent to Iraq while homeowners can stay free.

Jack, this hedging product will not add liquidity to real estates. The transaction cost of housing will still be high. Because of the difficulties in arbitrage operations, it is unlikely that volatility in the proxy will find its way into the underlying asset.

Illiquidity will not prevent a crash. This is evident in many prior real estate delines. On the contrary, it actually reduces market efficiency and encourages cycles.

Perhaps this is another thing that we should agree to disagree.

"Derivatives on another hand are just an insurance which is not likely to produce new housing."

But worried renters can also buy this insurance instead of homes. This will reduce the demand for housing as an asset.

I may be misguided, but I hope that this hedging product can allow home prices to follow fundamental factors more closely in the long run.

Jack, home prices are sticky because it is difficult to find buyers in the downturn due to illiquidity. The "train wreck" can be seen in slow motion, but one will have to escape in slow motion too.

JG, thanks for the update in Mass. Year-over-year inventory is way up in many places. The signs are out there if one cares to look.

I will be looking for bargains. Perhaps a complete crap on a decent lot. I am going to demolish it and put a pre-fab house there. :)

Or foreclosed land with approved permits...

Will they still have construction-to-permanent loans?

Since construction cost is mostly constant and is a large portion in home price, a decline in home price will entail a severe decline in land value.

Speaking of pre-fabs, I have quite some respect towards Michelle Kaufmann.

Take a look at this house:

http://livemodern.com/glidehouse

Love it or hate it, but a lot of thought regarding sustainability has been put into the project.

Jack>"One thing I DO know is that a reasonably and realistically priced house in ANY market will sell, and by “slow motion” I meant that it is easy to see what the prevailing prices are and price a house accordingly. If a seller really wants to sell IN ANY MARKET, all he has to do is drop the price rather than wait. I have seen this first hand over and over again."

And that brings us to square one....a lot of people are not being reasonable OR realistic in this market. There are also a lot of hard-headed sellers that insist that "their" house will sell at the price they set (which to them is the correct price). Until they see the handwriting on the wall, they will either stand pat and wait for the hungry hunter or take it off the market.

BayQT~

"You’re going to wait 5 or 6 YEARS?"

I will wait 15 years if it is necessary.

"Seriously though, I was just saying that there IS a simple remedy for a slow moving market– drop the price."

This is true though. But in a down market recent comps are not easy to come by and sellers do not like to ask for much less than the comps. Realistic prices are almost always good most of the time.

"Its only necessary if you say it is"

There are actually quite a few things that will change my mind even without a correction:

1) A realisitc forward looking P/E ratio due to increasing rent or realistic expectation of such case

2) A jackpot win :)

3) A successful emergence of the aforementioned hedging product that somehow restricts participation in the upside. (I will explain this later)

4) A successful emergence of a 0% loan with a 70 years interest only period

I really hope that sustainable engineering can get more attention. With great ideas and some smaller compromises, the world can be a lot more livable, now and in the future.

I absolutely agree with you, Jack.

For you local posters....did anyone notice on the news story (KRON4) tonight that San Francisco has lost 32,000 people between 2000 and 2004. They included a lot of census info, and that the biggest reason was/is that people are being priced out of the housing market. They did, however, interview a guy (city planner??) that mentioned that there are a lot of plans for new affordable housing on the planning table. Hmmm...I wonder what he means by "affordable".

SF Population in 2000 - 776,665
2001 - 774,479
2002 - 761,983
2003 - 751,908
SF Population in 2004 - 744,230

BayQT~

If they only provide a way to hedge against falling home values without a way to speculate on higher prices, the bubble may stay inflated for a bit longer.

This arrangement will take risks away from homeowners without taking fear away from prospective buyers. The strategic balance will be altered forever. Prices will fall only when people finally realize that owning costs a lot of more than renting. This will be a very slow process without having to bear the pain of falling prices.

Please tell me that I am wrong.

Jack > Affordable means too small in a bad neighborhood and you cant re sell it EVER

LOL! That sounds about right. :-(

BayQT~

"And the REASON you can always sell by dropping the price, even in a slow market? The “slow train wreck” factor of course! One of the many benefits of real estate!"

That is if you have a reasonable house though. Fixers will be a tough sell.

There is also an art of pricing. If you lower too much buyers may think that you are desparate and further low-ball you.

"People already know that owning costs a lot more than renting."

But they do not believe that yet. (They still think they are paying a premium for appreciation.) :)

You investment guys ... live it

I am just some one with a very strong interest in finance. It is really an amazing subject on its own, but what drives me is the philosophy behind it.

I don't think a see things on paper too much. It is just that things should not deviate too much from whatever it is on paper, no?

"Its no fun when you KNOW somebody really wants your property but they think youll drop further and further if they wait."

This is why deflation is so destructive. Just wait and your purchasing power increases... Who will want to buy anything?

ajh, I am pretty sure that the MACRO will be cash settled. I am not too sure about its lifespan though.

I also do not know whether MACRO is shortable like options. If it is not, residents can only buy "Down" MACRO to hedge, which costs money. Even if it is shortable, the margin (performance bond) requirement of a short option with that level of exposure will not be low.

You are right that current supply may be affected. However, demand will also be reduced as many investors/speculators will take the MACRO route. (Realtors(tm) better become MACRO brokers too.)

On the other hand, if prices are high, home builders can use MACROs to hedge against fall prices and fearlessly flood the market with supply.

It is still too early to understand all the effects of this MACRO. We will probably have to wait and see. It would be prudent to define a game plan ahead of time and react to market reactions if necessary.

There are actually several factors that may change the stickiness of prices:

* The number of house-rich, cash-poor boomers with low cost basis that are near retirement

* The number of speculators who must foreclose because of *very* high leverage

* The number of recent marginal homeowners who rush to break even

Such factors were not present during previous downturns.

Fake P, I do not condemn speculators in general. My hero, George Soros, is a speculator, perhaps the most suscessful one. Perhaps you misunderstood me. I do get frustrated at stupid speculators who do not understand leverage and are putting our financial system at risk.

Federal Reserve rate increase story:

http://www.usatoday.com/money/economy/survey/2005-06-29-econ-survey-usat_x.htm

BayQT~

Economic forecasts; results based on survey of 55 top economists, June 21-27 (from USA Today):

Federal funds rate taget

2005 Q3 - 3.5%
2005 Q4 - 4.0%
2006 Q1 - 4.0%
2006 Q2 - 4.0%
2006 Q3 - 4.25%

TWIT, If this follows along with your time line, the folks with 2004 ARMs that will adjust in 2007 will be in for a tough time.

BayQT~

"No bursting bubble?"

Another rearview mirror analysis. Brilliant.

Someone has a collection of quotes around October 1929:

http://tinyurl.com/9qqj4

"If this follows along with your time line, the folks with 2004 ARMs that will adjust in 2007 will be in for a tough time."

Especially if they cannot take home equity loans to pay for their mortgages because prices have declined.

I am not an economist but I think this rate forecast is just as possible:

2005 Q3 - 3.5%
2005 Q4 - 4.0%
2006 Q1 - 4.5%
2006 Q2 - 5.0%
2006 Q3 - 5.5%
2006 Q4 - 5.0%
2007 Q1 - 4.0%
2007 Q2 - 3.0%
2007 Q3 - 2.0%
2007 Q4 - 1.0%
2008 Q1 - 0.25%

A direct quote from Fake P's Hollister article:

"What’s more, even buyers who stretch themselves to the limit for their next move are unlikely ever to default on the new higher payments. For one thing, down payments are often so high that buyers feel there is no way they can walk away from their houses, no matter how onerous the interest, tax and insurance bills may become.

This is reflected in new figures from the national Mortgage Bankers Assn., which show delinquency rates in California at just 2.04 percent over the last five years of massive price increases, one-third the level in relatively low-priced Texas, where 6.8 percent of borrowers were behind on their payments.

All of which probably means that even if California’s coastal real estate price increases slow as the year goes on, chances are there will be no bursting bubbles. And inland prices likely will keep rising indefinitely, so long as the concurrent forces of immigration, greed and the fear of being left behind remain powerful."

All very interesting. Here's a question: Does the delinquency rate include foreclosed and REO homes? Plus, all of the rate adjustments for ARMS and I/O loans haven't hit yet, right?

"...no way they can walk away from their houses." Well, DUH, they especially won't be doing that once the new bankruptcy law kicks in in October. And they how will they look at that? "There's a new low in bankruptcy filings, even with all of the exorbitant home prices! Wow!" Yeah, right...they should say that to folks who don't read about what's REALLY going on.

BayQT~

For one thing, down payments are often so high that buyers feel there is no way they can walk away from their houses, no matter how onerous the interest, tax and insurance bills may become.

Is this a joke? A $0 down payment is certainly very high.

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.