patrick.net

But do you account for possible rise in nominal prices due to inflation itself?

We just purchased in Garden Grove (nicer area of it) in Feb. We paid equivilant to 2001-2002 prices already (inflation adjusted). I think we will see prices drop but I don't think it would be the 40%+ your thinking. For us, if interest rates went up 2% (to 7%) we would have to see a 20+% drop in the price of the house we bought to have the same payment. If it went up to 10% it would need a 40% drop.

Irvine needs an adjustment down, I don't know if you will see 40% though. Maybe it will get low enough Irvine Co will buy it all back up to protect it's stepford community (I lived in Irvine for 5 years).

Long term house prices have a lot to do with salaries/wages. If house prices continue to go up faster than salaries, at some point no one can afford to buy. Since the true unemployment in CA is about 23%, I am waiting the soCal price to drop further by 25%, as I summarized in my previous post.

I haven't seen much discussion on "who" normally sells. People who are going bankrupt? People switching jobs, requiring a relocation? People needing to go up in house size? People needing to get something smaller? People who just want to move to a better location? People retiring and wanting to get out completely? Bank owned properties?

The market has a lot of homes for sale, but the % of the above list has likely changed dramatically. People who don't need to sell, are probably holding onto their homes instead. Which is probably pushing down the number of homes for sale on the market. Everyone thinks that foreclosures are going to swamp the market at some point, but I think as they're added other people will pull their homes and wait for a more favorable conditions. There are definitely more foreclosures going on the market than personal properties being pulled, but I'm guessing we've peaked.

At some point in the future, people will put their properties on the market, when they can't wait any longer. I'm betting they will do that at a steady pace over the coming years, as they come to terms with the market or feel comfortable with it. This will probably keep housing prices stagnant long after banks are done with all their foreclosures.

When the normal ratio of people selling returns will likely be 5+ years off.

On a positive note, all those people holding onto their properties are gaining equity at a faster rate. If they've held for say 8 years now, holding onto a property for 5+ more years will significantly increase their equity and the amount of money they would place down on their next property.

My bearish outlook mainly came from this article from Robert Schiller.
http://blog.ml-implode.com/2009/11/case-shiller-still-predicts-massive-45-fall-from-todays-values/

I am bearish on the economy as well. IMO, the economy has no chance of recovering for the next 5+ years. We are headed towards a very deep depression worst than the 1930's. With the helicopter Ben in power, he will bailout everyone with printed money until rates go sky high just like they did in the 80's. I can see a good rebound in housing if my predictions are way off but I just don't see that happening what so ever!

Thanks for the the feedback guys. I myself have been waiting since 2006 to buy a home in Irvine or a surrounding neighborhood. Renting sucks but I think buying would be even worse!

SF ace says

3. Alt A implosion coming soon. The biggest threat to foreclosure is underwater, not payments. If you are able to make payments through 2009, ALT A itself will not cause you to implode.

Something like 90% of alt a holders are paying the minimum payment which puts them in a negative amortization position. Once the total of the loan goes about a present amount the loans automatically revert to a conventional loan with the payout period being recalculated into the time left on the mortgage. Payments can easily double, triple, or more. Since 25% of alt a mortgages are 60+ days behind at this point that's a problem.

Jimmy says

he will bailout everyone with printed money until rates go sky high just like they did in the 80’s.

It's dangerous to knowingly call what's going to happen to rates. The 10-year peaked in 1981 as Volcker tried to kill the economy so Reagan would have a clean slate, and fell from there (14%) to 6% in 1993.

Japan's 10 year bond is yielding 1.3%.

Jimmy says

Renting sucks but I think buying would be even worse!

The way I keep my sanity is seeing if annual price drops on a nice place is less than the annual rent I'm paying now. Since I've been here that's been true.

SF ace says

All signs are unemployment peaked in 2009 and 2010 will represent modest recovery. Jobs will be added, but the question is how strong is the job recovery going forward, not whether unemployment will get worst.

Actually the economy needs to add 200,000 jobs per month to just grow with population. The baby boom peaked in 1955 so the big bulge is still on 55 right now and still has to work.

We've dug a pretty deep hole:

and I don't really see how 2006-level employment is coming back.

For us, if interest rates went up 2% (to 7%) we would have to see a 20+% drop in the price of the house we bought to have the same payment. If it went up to 10% it would need a 40% drop.

My spreadsheet says a $500K house @ 5% has a starting carrying cost of $2300/mo.
At 7% rates this indeed does fall to $400K, 20% down which is matching your numbers.

I think people who say we'll only see high rates with high wage inflation are correct, but if the system goes bonkers it is possible to see high rates with high unemployment.

In game theory terms, we have 4 futures:

wages go up, rates go up

likely? Hard to say? Where's the engine for job growth to drive wages? It would have to be government spending a la Japan.
In this case buying now is something of a wash since the higher rates cancel the buying power of higher wages (but higher wages will push up rents, which push up prices too)

wages go down, rates go up

This is Mayan armageddon and you DON'T want to buy and see this happen

wages go up, rates go down

Not gonna happen.

wages go down, rates go down

Japan deflation. This case, buying probably not the best strategy.

http://www.cmegroup.com/trading/interest-rates/stir/eurodollar.html

The market-consensus interest rate for the future is equal to 100 minus the indicated settlement price (i.e., if the settlement price was 94, the interest rate would be 6%). This is for short-term LIBOR, so I’m not sure how much effect it would have on long-term mortgage rates, but it does show the market expects short-term rates to go up dramatically.

Senator Ron Paul speaks about the upcoming currency crisis and sky high rates. Will housing skyrocket from the massive inflation or plummet due to soaring rates? I would bet on the latter.

http://www.youtube.com/watch?v=EhYfm4f7PXQ&feature=player_embedded#

ask iceland, and greece if you can only have high interest rates with high inflation. Ask Argentina and Brazil a decade ago.

House prices have a way to go down. http://spiritnewsdaily.com/?page_id=628

SF ace says

Jimmy, No as your talking points are flawed.
1. Unemployment will get worse.
All signs are unemployment peaked in 2009 and 2010 will represent modest recovery. Jobs will be added, but the question is how strong is the job recovery going forward, not whether unemployment will get worst.

Do you really think that unemployment will be going down enough to offset recent wage declines?

Nah! there is no further bust in OC. It is full of Asians offering like 650K cash on homes that were priced 850K and they think it is bargain and it is okay to snap it for 650K cash.

SF Ace, the process on over all budgets which includes salaries is much more complex and is ultimately left to the Board of Directors, whim for review, comments, rejection or approval. Very little or anything is left to cover mid managers and staff employees needs or wants. As such leverage between employee and their boss doesnt exist.

When budgets are locked in there is little anyone can do but stick to their spending for the year. Deviations from spending often lead to consequences of mid-mangers losing their jobs because they spent to much or had a surplus (which could have been spend elsewhere). This may be during good and bad times. VP/Mid managers like to pad their budgets, but often that also leads to consequences.

Cash will be tigth for a long long time to come.

dadab says

Nah! there is no further bust in OC. It is full of Asians offering like 650K cash on homes that were priced 850K and they think it is bargain and it is okay to snap it for 650K cash.

The stuff under 350K in N. OC they are snapping up too....
http://www.redfin.com/CA/Garden-Grove/11932-Debbie-Ln-92840/home/3958908
Bidding war, 320K cash took it. That was common when we were looking below the 350K mark.

http://www.redfin.com/CA/Orange/4131-W-Tiller-Ave-92868/home/3689370
We put in a full price offer on this one... it ended up going for $420K....

If you don't buy now - you will be priced out forever! It said so right here.... http://www.youtube.com/watch?v=3DfkjbJ5vPU

Hiring a decent level employee in the SF area, costs around $25,000. Losing an employee not only means finding a new one and retraining them but morale and lost business opportunities.

Many managers realize that, yes there is a huge number of people working, but short changing them for a 1 year, maybe 2, isn't worth it. They will be hired, and instantly start looking for a better offer. Or as soon as the economy starts turning around, start getting offers at higher salaries.

Some companies and managers don't look long term and only look for year end savings, but others realize that 2-3 years down the road, this person isn't going to be there, even if you give them a raise, likely from animosity of having to work 1-2 years at an embarrassingly low rate compared to coworkers.

So saving 25,000 for a year, only to spend it the next on rehiring and retraining someone isn't really worth it.

Now not all companies think like this, and some will take the opportunity to drop wages somewhat. But trying to really abuse their position, isn't going to win them favor, or savings in the long run.

theffernan says

If you don’t buy now - you will be priced out forever! It said so right here…. http://www.youtube.com/watch?v=3DfkjbJ5vPU

The last part was the most interesting 'if we didnt now, we would have lost the oppurtunity'.

Now versus then .... 'then' was when the same clowns said 'now' would not happen!

GOTTA LOVE ADVERTISING !

I honestly don’t know how strong the recovery is gonna be, but for sure we are recovering.

Indeed -- we are only bleeding out of one orifice now as opposed to two. Or wait...are we?

Sham Recovery by Robert Reich

http://www.huffingtonpost.com/robert-reich/the-sham-recovery_b_497439.html

...please do read it. I'd be interested to see your counterpoint, as I feel that Reich makes an airtight case.

Note that I am really addressing college educationed professionals which have a much lower rate of unemployment anyway. I actually only know of one college educated who is unemployed so maybe there is a different world. The dynamics may be totally different for non-degree.

Unfortunately, I talk to college grads all the time who are subsisting via part-time hours at Starbucks while paying off their student loans one nickel-n-dime at a time. I know two personally in the last year who shipped off to Asia to find their fortunes.

Austinhousingbubble says

I know two personally in the last year who shipped off to Asia to find their fortunes.

That's what I did in 1992 -- kinda jumped from the frying pan into the fire with that move, as the internet (and Windows 95) changed everything back in the states, for a while at least.

I don't see how there can be any meaningful recovery without jobs and how can jobs be there like old times as all have been shipped to China / India. And I doubt fed can do anything to get them back.

pkennedy says

Many managers ... but short changing them for a 1 year, maybe 2, isn’t worth it.
Some companies and managers don’t look long term and only look for year end savings, but others realize that 2-3 years down the road, this person isn’t going to be there, even if you give them a raise, likely from animosity of having to work 1-2 years at an embarrassingly low rate compared to coworkers.

Actually these managers have practical sense. My view is that most workers are not stable, they will migrate out of their current jobs, either because of higher wages eleswhere or personal cercumstances. So giving them "higher pay" now don't generate best benefits for the company. But I am not like those most workers.

Glenn Beck on home prices:
http://www.youtube.com/watch?v=DCx-EWwh0IA

Jimmy says

Glenn Beck on home prices:

I watched that with my zen mind.

1920s were an immense housing boom that crashed in 1926, which had follow-on effects.

1936 was the middle state of the collapse of global trade. The supreme court had little to do with this.

WW2 the 1940s was the middle beginning of the housing crunch when millions of soldiers came back from the war as men and started families on their own.

The idiocy of this clip is running deep when he starts talking about the market "wanting" what houses cost in 1890-1910.

The total presidential vote in 1912 WAS UNDER 15 MILLION. Good land was still free for the taking via the Homestead Act in the midwest. We were still largely an agrarian nation tied to the land.

The 1970s boom was caused by the consolidation of mass suburbanization, the baby boomers of 1950-1960 forming households en masse 1970-1980, wage-price spirals as the follow-on effects of Nixon taking us off the gold standard, and the rise of two-income households that pushed up buying power and hence prices.

We can't understand how to stop the downward spiral from 2006 if we don't understand how we got up there in the first place, and Beck didn't make any analysis of that.

"The market always wants your house price to be about here" --- grrrr.

This blithering idiot doesn't understand the first thing about markets. Home prices are based on household wages and how our takehome incomes are apportioned among our needs and wants.

Housing is the first priority for us so it takes the lion's share of our after-tax income. Note that the 2001-2003 tax cuts significantly boosted after-tax income -- guess where most if not all of that new income ended up 2003-2006?

F---ING HOME PRICES.

Furthermore, innovative if not suicidal lending practices of 2002-2007 also juiced the market up as buying power was boosted by interest only, teaser-rate, and stated income loans, often in combination, plus of course the mortgage interest rate drops of 2002-2003.

Japan has managed to support their zombie housing market (that they killed in their five year borrowing orgy) with 1-3% interest rates. We are trying to do something like that by keeping mortgage rates under 5% and trying to get people to refinance their loans with these lower rates if they can make the payment.

The Obama speech Beck was pulling from was his speech announcing HAMP in the first full month of his presidency.

Where was this TV clown 2003-2006 as the nation was digging itself into the 10 trillion dollar hole we're in now???

I don't have any solutions but I certainly admire the problem.

Here's CS nominal chart.

That's a pretty f---ing impressive graph.

No way I'm stepping in front of that train. The graph is basically the market I'm in.

I don't really see a problem with this graph. The CPI and home price series are bound tightly until the late 80s, this will keep the normalized real index at ~100 until then.

The late 80s was a regional bubble that collapsed in some areas and overall the market was slowed until rising wages and lowering interest rates caught up with the market in the mid-late 90s.

Greenspan started putting on the brakes in the late 90s with higher mortgage rates but since then we've been backing off:

http://research.stlouisfed.org/fred2/series/MORTG/

Worrying about the 100yr track of home prices is retarded.

This is not 1900, 1950, 1980, or even 1990. Major shifts have occurred and I don't think anyone has any solid idea on what's going to happen over the next 20 years. Mr Bond's 10 year yield at sub-4% is echoing this.

We need wage inflation but we're going to back out of the last 20 years of policy decisions to get it, or extend government spending from its present 40% of GDP to 60%.

SF ace says

“the trend is clear. More than 93 percent of the 90 companies that responded to the survey expect to hire in the next six months” Also, “A recent survey of private companies by global accounting firm Grant Thornton International found that 51 percent of 250 U.S. respondents felt optimistic about the economy. Nearly a third said they plan to increase their work force in 2010.”

That may indeed be true, there is no doubt 90-95% may claim to hire again, but what region will they hire back into ? I dont for one expect several types of jobs to come back locally, as they were moved perm. to other states or overseas even during the downturn. The largest employers will not expand locally, they rather get away from expensive urban core regions infavor of less expensive rural areas like Fresno. All this will push the burden to smaller companies to aborb the unemployed if that is possible. We wont know how it shapes out for a few years down the road.

Aren't smaller companies one of the largest contributors to employment in the US?

http://www.youtube.com/watch?v=fKKp6-al8fk&feature=quicklist

pkennedy says

So saving 25,000 for a year, only to spend it the next on rehiring and retraining someone isn’t really worth it.

Few, if any tech employees are worth a damn until they have at least 3 years of experience. On top of that, a tech employee who jumps into a new company/group/team has a steeply upward sloping productivity. In the beginning they are drags on production and don't hit their stride for 1.5 to 2 years.

The company you are describing is either so strapped for cash that they literally can't pay salaries, or they decided that employee is a lemon.

@CBOEtrader

Exactly. Hiring someone by short changing them for a year because you can. Because there are desperate people out there, isn't going to create long lasting good will. In a year, they'll jump ship.

A good tech worker I've found trends up within 3-6 months. They're doing productive things. 6-12 months they've got a solid handle on things, and after that, they' know all of the sub systems and all the ins and outs of the business.

Wages shouldn't be dropping by that much, because the cost of living hasn't dropped by much. Someone might sacrifice pay to get a job, but in the end they'll regret it, and the company will pay for it. Companies who take the cheap route, are probably run by managers who are just trying to keep their budgets down, while increasing head count.

I think that employment prospects are different for those without college degrees right now. I know several people who are unemployed with significant experience in their fields, but without college degrees. Three of them--one a programmer with 15+ years of good experience--have been unemployed for more than a year, looking for work, and finding nothing. The programmer will probably try moving to the Bay Area, since some of it probably comes down to location in his case, but I think that the degree is just one more thing for HR to check off before passing a resume to a hiring manager. I don't know how much it really matters when it comes to job performance, but it certainly matters when it comes to getting hired.

Oh yes the taxes should be the icing on the cake for the economy.

Unemployment, interest rates, inventory are all well-known threats but the housing market and the future is most threatened, I think, by some "black swan" event: something largely unexpected hitting us from out of left-field.

The BP mess is one example of a black swan (The term "black swan" from the Taleb book of the same title). It will change the dynamic of the elections. Another was 9/11. These events then are compounded by the butterfly effect as the consequences of the event ripples through the population.

For example: 9/11 happens, Pat Tillman dies from friendly fire. Black swan; butterfly effect.

The talk on end of the world internet sites is the threat of a dirty bomb going off in a major US city. That happens and I can only wonder what the effect on real estate prices will be. People will not only bail out of the affected city (or cities), obviously, but all big cities.

In the next few years Peak Oil could go from the province of the lunatic fringe to the reality of $10 or $15 a gallon gas. That would kill housing prices in the suburbs and raise them closer to the work centers.

Climate change is the third horseman of this perfect storm apocalypse. Maybe climate change will reduce food production, maybe it won't. But if it does, all bets are off as the US will be inundated by starving refugees from south of the southern border.

Again, the prospects you mention are real but we can deal with them and have done so in the past. It's the black swan lurking just over the horizon and that we don't know that could be the real problem.

tmgbooks,

The Black Swan will be a "triggering event" but what it triggers will be more fundamental and make regression to fundamental valuations of things like house prices, rents, wages etc. I agree about the black swan, if you or me or someone else wrote it here then it is not beyond imagination, and so it is not the Black Swan.

SF ace says

Note that I am really addressing college educationed professionals which have a much lower rate of unemployment anyway. I actually only know of one college educated who is unemployed so maybe there is a different world. The dynamics may be totally different for non-degree.

I have to totally disagree from my experiences. I work in the film business in Los Angeles and aside from a freeze on wages at some companies... layoffs have been rather light. BUT, any other industry outside of entertainment or high tech internet companies... everyone else seems to be leaving the state. I know for a fact that Insurance companies have stopped hiring and are closing down entire branches and downsizing dramatically in CA. I personally know 10+ college educated individuals who worked in insurance for years who can't find a single job listing in their field.

Feel free to do a job search for jobs that pay $40K a year plus benefits... a very low-average salary for a college educated late-20 early 30 year-old in 2010. You won't find many at all...

If you fall into the 20-25% pool of unemployed in los angeles, don't work in the film industry, you are pretty fucked.

1. Unemployment will get worse
2. Rates will be in double-digits
3. ALT-A Implosion coming soon
4. Record # of foreclosures will continue
5. Banks are holding a very large # of inventory to keep home prices propped up

Inflation going up?

All indications that rates will remain low for a long time to come. Little demand and lots of supply of goods and services, resulting in lower wages/salaries as employers realign their business. We saw this happen in 2000 and now again in 2010. All good reasons for deflation to continue.

thomas.wong1986 says

1. Unemployment will get worse

2. Rates will be in double-digits

3. ALT-A Implosion coming soon

4. Record # of foreclosures will continue

5. Banks are holding a very large # of inventory to keep home prices propped up
Inflation going up?
All indications that rates will remain low for a long time to come. Little demand and lots of supply of goods and services, resulting in lower wages/salaries as employers realign their business. We saw this happen in 2000 and now again in 2010. All good reasons for deflation to continue.

Let's see how the US dollar looks at the end of the year. I'm sure the dollar index will break it's all-time low of 71.