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As Predicted in 2006


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2012 Jul 30, 1:04pm   24,027 views  61 comments

by Randy H   ➕follow (0)   💰tip   ignore  

This is from one of our discussion in 2006. There were topics on Patrick.net and in my own blog (capitalism2.org) which featured the [then new] Case Shiller method and a healthy dose of linear regression.

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1   Buster   2012 Jul 30, 1:16pm  

Yep Randy, then you and Shiller called it exactly right, perhaps just shy of what we will soon discover as the bottom. (It appears to me to be Q1 of 2012). I don''t doubt that there may be an 'over correction', especially in some regional markets, but for most markets I believe that we have reached bottom and will resume the more normal uptick correlated with the trends of inflation. However, I suspect that most will ignore this prediction (at the bottom), just like those who did at the bubbleicious Top. I am not advocating a 'buy now or be priced out forever' mentality, rather, if you have been saving and waiting to buy, now may be a great opportunity that you have been waiting for. Disclosure: NO, I am not a realtor. Just a realist.

2   anonymous   2012 Jul 30, 2:27pm  

One thing is for certain, there will be an inflection point where house prices stop going lower. We are five years into the crash now, and interest rates on 30yr mortgages have gone from 7.5% in july 07 (market had just peaked) down to 3.5% today. The push/pull relationship of house prices and their main driver to mania levels, is driven by 30 year mortgages. Let's not forget, there's been government intervention pretty much non stop ever since the market crashed.

First time buyer credit
First time buyer credit rd 2
Quantitative Easing
QE2
The year of forclosure gridlock because of robo signing
Operation twist
New FHA program allowing people to refinance underwater properties down to current rates with no docs. No income. No credit. No appraisal

Sounds to me like they are getting desperate, because what happens next?

You've sucked forward a bunch of demand
Crushed interest rates to ZIRPfinity
And now the government is back to promoting and backing no doc no skin in the game re-fi's

Are you bottom callers claiming that now all of that doesn't matter, and we'll have organic markets rising back into perpetuity?

To say that none of that matters, ignores the most important facts about why we got here. I'm of the opinion that rates will continue lower and that will allow prices to remain flat in nominal terms.

* this just in, the USPS says it is losing 25million per day, and will default on its scheduled payments to the USTreasury of 4.5 billion now and 5.4 billion in Sept

* the usfedgov is set to begin auto cuts in spending in less then six months from today, and the military (spending)is going to contract

What we're seeing now seems like a bifurcation of markets, where high demand low supply areas are in an uptick, or at worst flat, and low demand/so supply doesn't matter much areas are continuing their long skid. In order to keep upward momentum, you need peope waiting in line with 30yr mort approved to pay a premium, and that guy is still out to lunch

Also have to figure that the usfedgov isn't anywhere near ready to just throw in the towel if the present schemes don't "work", get ready for plan b, more fenangaleng and more lower rates

3   thomaswong.1986   2012 Jul 30, 4:56pm  

Randy H says

This is from one of our discussion in 2006. There were topics on Patrick.net and in my own blog (capitalism2.org) which featured the [then new] Case Shiller method and a healthy dose of linear regression.

mid-1990s prices plus inflation... surely you must be drunk ! thats what many would say anyway !

you certainly have my vote.

4   Bap33   2012 Jul 30, 5:32pm  

I can be found on the record saying it would be 1999 prices plus historic appreciation for the 209 area. I was pretty close so far.

6   StoutFiles   2012 Jul 30, 11:47pm  

Case Shiller didn't take into account the huge amount of government intervention, which is setting us up for another crash. The country is broke; tax increases and more job losses are on the horizon. People can't buy houses even with this low interest rate if they can't stay employed.

7   everything   2012 Jul 31, 12:08am  

Housing market is still a good scam. House, up the block from mine hit the MLS at 51k, then they changed it to 62k, I called the realtor and said, how did it go up 10k in 2 days, he said it was priced to low, it sat for about 6-8 months, then a flipper bought it for 32k.

8   CrazyMan   2012 Jul 31, 12:53am  

It's too bad the bay area doesn't match that chart. At all.

You're taking national numbers and applying them to a certain region, which is a mistake.

9   StoutFiles   2012 Jul 31, 1:26am  

CrazyMan says

It's too bad the bay area doesn't match that chart. At all.

You're taking national numbers and applying them to a certain region, which is a mistake.

There is no logic in the bay area.

10   bmwman91   2012 Jul 31, 2:45am  

StoutFiles says

There is no logic in the bay area.

Because it is SPECIAL here! If you can't afford to live here, you clearly aren't blessed with the ability to innovate in the new, NEW tech economy. You are probably also too lazy...you gotta live at work if you want to own a house! That's all just part of the special'ness!

11   bmwman91   2012 Jul 31, 2:49am  

errc says

The push/pull relationship of house prices and their main driver to mania levels, is driven by 30 year mortgages.

I definitely agree that one of the major factors in RE market behavior is the mania factor. Everyone in my office and on my weekly business flights is talking about RE and how they "need to get in" to various Silicon Valley neighborhoods since the market "is back." It's a big positive feedback loop...a little mania here begets more mania elsewhere, which begets more mania and so-on. The mania train has left the station and is building steam in the SF Bay Area, as far as I can tell. If I can convince my fiancee to keep renting for a few more years, we might be lucky enough to see today's suckers get burned. Incomes aren't going up fast enough around here to support these trends in increasing prices, and interest rates can't fall far enough fast enough from here to counteract that.

12   CL   2012 Jul 31, 2:50am  

bmwman91 says

StoutFiles says

There is no logic in the bay area.

Because it is SPECIAL here!

They can't build more land!

13   StoutFiles   2012 Jul 31, 3:00am  

CL says

They can't build more land!

You could always buy up a bunch of Nevada real estate on the cheap and then sink California. Prime beachfront property!

14   freak80   2012 Jul 31, 3:02am  

StoutFiles says

You could always buy up a bunch of Nevada real estate on the cheap and then sink California. Prime beachfront property!

Or just buy a bunch of land in the Southeast US that is a foot or two higher than the current sea level. In 50 years, prime beachfront property!

15   Randy H   2012 Jul 31, 11:58am  

Just for reference, this analysis was for aggregate national prices, not for any particular city or locality. It turned out pretty accurately for those outside of the major metros where things tended to remain on the extreme highs or lows.

I only resurrected this because when it was originally aired most of the objections were about Case Shiller. Funnily, the realtwhores argued that CS-I was a bogus index because it didn't reconcile with NAR propaganda while permabears argued it was garbage because it didn't reconcile with Peter Schiff's dire predictions of hyperinflation, death of the dollar, and angry mobs burning the whitehouse down.

16   Buster   2012 Jul 31, 12:49pm  

errc says

What we're seeing now seems like a bifurcation of markets, where high demand low supply areas are in an uptick, or at worst flat, and low demand/so supply doesn't matter much areas are continuing their long skid.

Exactly. Que to Detroit vs San Francisco.

17   thomaswong.1986   2012 Jul 31, 1:00pm  

CL says

They can't build more land!

While driving on Winchester.. an old plot of land across the Valley Fair Mall is being turned over to new housing.. similar new developments are also going up near San Thomas Express Way.. 3 new developments so far...

Where there is a will, there is a way!

Map winchester and stevens creek

http://maps.google.com/maps?hl=en&safe=off&psj=1&bav=on.2,or.r_gc.r_pw.r_qf.&biw=1187&bih=536&q=winchester+and+stevens+creek&um=1&ie=UTF-8&hq=&hnear=0x808fcae055ec5161:0x21bea167da6cbbad,S+Winchester+Blvd,+Santa+Clara,+CA&gl=us&sa=X&ei=BZsYUPmYD6f8iwL5zoDYBg&ved=0CAYQ8gEwAA

18   Dan8267   2012 Jul 31, 1:05pm  

The real estate market is likely to "bottom out" around 2011.

This analysis assumes that the bottom will be at fair-market values. In all of human history, there has never been a bubble market that has not over-corrected in the burst. I wouldn't count on the housing market not over-correcting.

19   Peter P   2012 Jul 31, 1:10pm  

Dan8267 says

This analysis assumes that the bottom will be at fair-market values. In all of human history, there has never been a bubble market that has not over-corrected in the burst. I wouldn't count on the housing market not over-correcting.

But the burst was somewhat contained by massive liquidity injection. This is why the market is getting weird. But in the end, nothing can stop true market forces, so I will correct, just a matter of time scale.

20   FortWayne   2012 Jul 31, 1:13pm  

errc said it best. This nation is so financially screwed, housing is lease of our worries.

And when the plug gets pulled, it will really hit the fan.

21   thomaswong.1986   2012 Jul 31, 1:14pm  

Randy H says

I only resurrected this because when it was originally aired most of the objections were about Case Shiller.

In your thoughts, does it prove/disprove any relationship between prices and interest rates? As we learned, the relationship between rates and prices doesnt exist.

22   thomaswong.1986   2012 Jul 31, 1:18pm  

FortWayne says

housing is lease of our worries.

you hit the bulls eyes! CA is still high on the unemployment count. I

http://www.bls.gov/web/laus/lauhsthl.htm

California June 2012 10.7 % Oct. 2010 12.4%

23   Peter P   2012 Jul 31, 1:34pm  

thomaswong.1986 says

As we learned, the relationship between rates and prices doesnt exist.

Perhaps not linearly. But we all know that it is a complex nonlinear system with many feedback loops.

24   Rin   2012 Jul 31, 1:40pm  

Ppl, isn't part of the answer is where the white collar jobs are going?

Right now, I see no better place to buy than the Dallas-Houston-SA triangle. The 3:1 mortgage to income ratio holds well over there and for the most part, the work which is being in-shored is headed in that direction over the former bubble zones like the Boston-DC corridor. All and all, how badly can a $220K/3 bdrm home in Dallas go, when companies are adding headcount all around? The risk is in let's say places like greater Boston, where former big wigs like Fidelity are routinely sending thousands of jobs to other regions, defense contractors re-direct future projects to TX/CO/VA, and other companies basically suffice on their prior skeleton crews, simply replacing those who periodically quit.

25   Dan8267   2012 Jul 31, 2:11pm  

Peter P says

But the burst was somewhat contained by massive liquidity injection. This is why the market is getting weird.

Oh that's why. And here I thought it was because of the massive accounting fraud and the banks holding onto bad debt because foreclosing would force them to recognize losses.

26   Peter P   2012 Jul 31, 2:12pm  

Is there a difference?

27   Dan8267   2012 Jul 31, 2:44pm  

Peter P says

Is there a difference?

Probably not.

28   bubblesitter   2012 Aug 1, 1:15am  

Philistine says

thomaswong.1986 says

California June 2012 10.7 % Oct. 2010 12.4%

And don't forget that unemployment numbers do nothing to measure underemployment or shrinking wages.

Haha..Nailed it...and some people still think worst is behind us...delaying the inevitable by 5 years? 10 years? 15 years?...sounds familiar...Japan tried that...but failed miserably...

29   Randy H   2012 Aug 1, 1:19am  

Yes, life is horrible in Japan. What a miserable failure.

Give me a break.

30   bubblesitter   2012 Aug 1, 1:20am  

Randy H says

Yes, life is horrible in Japan. What a miserable failure.

Give me a break.

Reticulating Splines

Who is talking about life? We are talking about home prices. :)

31   Randy H   2012 Aug 1, 1:21am  

CrazyMan says

It's too bad the bay area doesn't match that chart. At all.

You're taking national numbers and applying them to a certain region, which is a mistake.

Please point out where, precisely, I made the above referenced mistake? Please copy/paste where I applied anything to a certain region.

32   Randy H   2012 Aug 1, 1:24am  

thomaswong.1986 says

In your thoughts, does it prove/disprove any relationship between prices and interest rates? As we learned, the relationship between rates and prices doesnt exist.

Why are you asking a question you already seem to have answered? I assume you aren't interested in learning that there indeed is a proven relationship between interest rates and prices, but that it is not linear. The function driving prices is extremely noisy and at best is approximated by a multi-linear analysis, of which interest rates are but one variable.

33   freak80   2012 Aug 1, 1:28am  

Randy H,

Is "reticulating splines" a SimCity 2000 reference??? ;-)

34   Randy H   2012 Aug 1, 1:30am  

freak80 says

Is "reticulating splines" a SimCity 2000 reference??? ;-)

What I love about Patrick.net is that it's impossible to be clever around here.

Yes, I learned more about economics from SC2000 than from my overpriced ivy mba.

35   freak80   2012 Aug 1, 1:35am  

Randy H says

Yes, I learned more about economics from SC2000 than from my overpriced ivy mba.

I don't doubt it!

Now if we could only get New York State politicians to understand the "death spiral" of high-taxes and outmigration leading to even higher taxes, and even more outmigration.

36   EBGuy   2012 Aug 2, 4:19am  

Randy, I still carry a folded copy of this chart in my wallet along with
Ivy Zelman's ARM reset chart. With rates like we have today, many ARMs were a good bet (although some folks did get slammed when they went to the full amortization schedule). I shudder to think where we'd be without the low rates. In my mind the ARM reset chart is why we've got to be Japan for the next decade. Those who can, did refi -- others will default if the rates go up.

37   Randy H   2012 Aug 2, 5:23am  

I think Japan is a reasonable model. A lot of what I based the Bubblizer on was from quantitative research derived from the Japanese deflation.

The reason a lot of people can't fathom the Japan outcome is that it is DEFLATION, not inflation that drove their macro experience. Deflation is hard for nearly all of us reading this blog to really comprehend, unless you're one of the few 85+ year olds who happens to be internet savvy. The fundamental evidence of deflation is all around, quite unfortunately.

38   Randy H   2012 Aug 2, 5:24am  

And deflation really would cause the original 2006 predictions above to go way off the rails. Be ready to crumble up that piece of paper in your wallet and toss it.

39   EBGuy   2012 Aug 2, 11:43am  

I don't see any upturn on the chart, so no need to toss it yet. (Its mostly for the "who could have foreseen this?" folks). The C/S Composites are still negative year over year; I'm betting we'll see new post peak lows come January. C/S SF Bay Area may be another story; I'll have to wait an see if the index turns early in August. Deflation Nation indeed. Heck, even my summer plane tickets back East are only $321 round trip this year. Last I checked, effective rates on short term T-bonds were negative and the Swiss and Danes were auctioning off debt with negative interest rates.
Any thoughts on virtual goods seller Zygna versus virtual goods marketplace Second Life? Parallels (maybe you could start a separate thread)?
As AF would say, potatoes are the only real alternative currency.

40   Randy H   2012 Aug 2, 12:43pm  

Comparison of virtual market bubbles. Now there would be a very interesting comparison. I'm not sure it would generate quite as much interest, but the data is there. I'll see if I can dig up some of the SecondLife research data I had from that whole circus. You know, to this date the only real brush with real world creepishness due to my blogging has come from the SecondLife cultists.

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