patrick.net

Easy to lose faith. This has got to be the longest and most persistent RE Bull market ever. The longer this drags on, people like myself who used to be perma-bears have begun to realize that we're in uncharted waters. We don't even have a parellel anymore for comparison. Except maybe Tulipmania. Even the scariest crash scares me less than what I'm about to describe. Follow me:

So the dotcom bubble would be our most recent bubble to compare -- during the dotcomedy, tech stocks traded at huge premiums. The most egregious offenders were stocks with no earnings at all, or operating in the negative, but after the "correction," although those worst offenders like Pets.com were decimated, there were some lasting effects: The silicon chip manufacturer trades at 60:1 P/E, and the potato chip manufacturer trades at historical norms, 15:1 P/E. I still have a hard time understanding why I should pay more for a dollar of profit from Intel, than from Pepsico, but it appears this "New Paradigm" is here to stay. Extrapolating now over to the housing bubble:

What if the most egregious offenders of THIS bubble also correct -- San Diego, Phoenix, the end of double digit returns, some lending reform, etc., but we're left with a permanent premium similar to the tech stock premium -- let's say housing costs fall from 9 times incomes, but fail to return to the 3 times income historical mean, and settles upon 6 times incomes? I don't think this is outside of the realm of possibility at all. And it would suck.

Dinor,
I subscribed to Cabela's when I lived in TN. Great magazine for rugged living equipment. They still sell Aladin kerosene lamps and wood stoves. Pretty cool. A few weeks ago I was driving around the abandoned military base and saw an old 50's airstream for $500. hell- that's about what I pay in rent. I wondered about trailer parks and whether I could just buy this thing and let that be home until whatever happens happens. It'd be cool to claim you live in a travel trailer to all the loft owners here at the office. They'd get a kick out of it, and I'd be paying next to nothing to live in it.

Red Whine,
I kinda worry about the shift you've just mentioned not only for california, but for many parts of the country. I've mentioned this a lot, but there are tons of people moving out to "escape", and what they bring to these regions are fresh jumps in RE value. I'll admit that at first I sorta thought there was little to no threat of the SE ever becoming a place that had the same problems as Ca, but in reality, this incredulously seems to be unfolding as we speak. It might come down to the point where it doesn't matter where you live and the race to find somewhere that is affordable, regardless of geographic area will start as most people my age skidaddle. I don't care about CA anymore. As far as I'm concerned, this area is cooked and if only rich people can afford it, let em have it. It's the people( people like me) moving out that worry me and what they will do to other regions as a result.The crash for me needs to happen sooner than later so that this exact pheonomina doesn't become a reality.

Red Whine,

Yes, it can be easy to lose the faith. I agree, we are in uncharted waters. I however have complete and unwavering faith that this will implode and with violence. Even for those in the BA. How will it be possible when the rest of the country is seeing explosive growth in inventory, already huge growth in short sales in Sacto, toxic loans meeting fluffed appraisals and there be "no" impact on the BA? The area is special, that I'll grant you but please visit some of the blogs from other areas and you'll find the same "it can't happen here" RE Bulls finding that yes, it can and IS happening here! Boston, DC, FL on and on. I hate to beat it to death but 2005 was not real. Virtually NO ONE that bought in "05" can sell today. They're underwater. Many completely under water as we're learning from the short sales sprouting up all over.

@DinOR, WW2 & Red Whine,

I sense the Force is strong with you, my young Jedi's!

@Randy H,

I am your father... come join the Dark Side...

Red Whine, WW2,

Some of my comments above address this issue to some degree. Right now the NAR is doing damage control in a big way! They need a "model market" that they can point to and say, "See, everything is as it should be". Still low int. rates, employment growth, rising wages = rising RE values! Nevermind that 1/2 to 3/4 of mortgage payers will be screwed for the next oh, I don't know...... DECADE! The NAR is frantically trying to distance itself from stock market like volatility! They are not interested in saving FB's. They KNOW these people are FB's! They sent them to a referral mortgage broker "that understands people in your position" remember? They couldn't care less. This is about realtors saving realtors! Last year $60 billion dollars were paid out in commissions. What's more important? The 60 Bil. they got paid or the 1 trillion in ARM's that will reset next year? If the American public loses faith in RE as the obvious investment vehicle of choice they will have to compete with Wall Street for investment dollars. Over the last 5+ years they haven't had to. God forbid homes become a place to "live in" again! Isn't that what all the mortgage brokers and realtors are telling us? You're a PLAYER damn it!

HARM,

If you think we're "out there" what about the guy in China that's getting the word out for people not to buy a house for another 3 years! I have to say, this guy has some brass eh? That's dedication!

Robert Cote,

Are you predicting a general deflationary depression? If so, then how will the mechanics of such play out? For the US economy, it would require both tight fiscal policy and tight monetary policy, over a period long enough to kill enough long-term positions to initiate general deflation.

So the Fed is going to raise rates through the roof, the federal and state governments are going to cut spending and even start running surpluses, and the USD is going to skyrocket, reversing it's FXR against the JPY and EUR.

Being that I'm long in more USD cash equivalent than I really am happy about like FRIFY, I'd be thrilled about what that means for me even if it is a terrible time for most of the rest of the country. I'll be buying that Atherton mansion with a small lunchbag of greenbacks.

George,

Thank you for including 2004 in the lunacy! In retrospect we'll look back and draw the obvious conclusion that 2004 was a year to be selling not BUYING as we revisit 02, 01 and 00 pricing moving forward.

Also your observation regarding "quality of life" degradation are spot on. Actually they are already happening as the House ATM spigot barely yields a trickle and mort. payments seem more burdensome each month. The dollars their mortgage broker told them were better applied to "as much house as you can buy" can no longer be directed to their 401K. Many will try to re-fi their ARM but even that will be at a higher payment than they are comfortable with.

On those with the resources to ride out a 20, 30 or even 40% correction suffering the worst? Sounds to me like many of these folks might be public employees? They'll be able to juggle their finances around b/c they know they'll at least have a steady check and are a good lending risk. True they may have to give up a lot of their toys and they won't like it a lick but if anyone "marginal" has a chance of hanging in there this might be the crowd.

*Not a general "slam" on public employees*

I see 2 things happening in my county (Marin). The rental market does seem stronger. However I also see inventory rise and time on the market rise in the starter home market (more Novato than more southern points).

I just think it will take time, and most likely reduction will come in the form of inflation, not dramatic price drops.

I did get around to watch Chris Thornberg's (Anderson Forecast) talk that was floating around: http://tinyurl.com/hpcea

At the end he made the point that all markets, high end and low end are linked, and that they will ulitmately all move (or stagnate together). So even prime places like Marin, require support from slightly less prime markets like I don't know certain neigborhoods east bay, followed by slightly further out neighborhoods, etc.

zeke

I know HARM is being a bit tongue-in-cheek, but I am a bit taken back that I’m suddenly being assailed as a bull. And HARM, tsk tsk. Wasn’t it you who some months ago shamed those who are guided by knee-jerk “common folk sense”? You did point to the rising “idiot culture” and lack of tolerance for science and logic as a major point of demise in our culture, after all. Some stuff is complicated, and that’s just the way it is. I don’t understand why nuclear reactors are so damned complicated, but I sure don’t want some folksy common-sense type taking over management of and production of them either.

Randy,

Yes I'm being "just a tad" tongue-in-cheek here. In all seriousness, though, I am certainly NOT advocating abandoning a scientific analysis of the data and/or economic fundamentals in favor of the idiot's "gut feeling" --far from it.

To be honest, I'm getting the impression that frustration with the unprecedented length/scale of the current bubble (which we all share) is beginning to warp/color Peter P's --and to a lesser degree your-- analysis. I get the sense that you two are looking at the data vs. historical trends and saying "WTF??? This can't be right, I must be missing something here. The bubble should have popped long ago --perhaps my assumptions are all wrong and this really IS a New Paradigm. Here, let me massage my numbers to explain the results..."

Remember, if you torture the data long enough, it will confess anything.

I most certainly am NOT advocating abandoning hard-eyed reason here. In fact, I believe you should both stick to your original analysis and conclusions and let the market prove you right or wrong. In the end I believe we (bears, market "fundamentalists", whatever you like) will be vindicated.

Huh?

Common sense dictates the only time to buy something where prices fluctuate is when prices are going down. We are starting to see that happen.

Don't bother trying to time the bottom - just look at the cost versus rent and make a reasonable decision.

The bears have to win because all people who don't have such common sense are currently either owners or priced out of the market.

I get the sense that you two are looking at the data vs. historical trends and saying “WTF??? This can’t be right, I must be missing something here.

It is just that from this point on my bearishness will be data-dependent.

SQT, there is little doubt that Sacto will correct severely. The increase in supply is amazing.

@SQT,

Thanks! Yes, it looks like sellers are going to need a lot more than (misplaced) faith in the value of their overpriced asset in the months to come. Perhaps they should get one of these and bury it in the front yard: http://www.luckymojo.com/saintjoseph.html

I think another massive injection of liquidity may not cause excessive inflation if it is precisely targeted towards only a few entities.

Yes, it looks like sellers are going to need a lot more than (misplaced) faith in the value of their overpriced asset in the months to come.

Some are still faithful. Indeed, the right properties in the right places are still selling. Everything else is sitting.

Higher prices on lower volume indicates a top is forming.

That's why some properties are still selling.

Not everyone is in the same mass popular psychology yet, particularly if they sold for good money in the last few months: some people are out there looking.

Don't try to catch the falling knife!

Robert Cote,

Interesting analysis, as always. I don't necessarily agree, but your logic is sound.

A couple of things, which you probably agree with: debt has only two primary positive functions: leverage and interest tax shield. Assuming leverage is a normal distribution of outcomes (as many get it right and win as get it wrong and lose), then the only value to the economy as related to output is tax shield. I don't know that we'll live to see the day when companies retain their interest tax shield yet individuals lose theirs. If they were to eliminate all tax shields then companies should become ambivalent about whether to issue equity or debt, unless they are speculating on being "right" and trying to use leverage to amplify their winnings.

Another point is the effect of your DEBTPRESSION on savings rates. If the American citizens rise to the occasion and pay down their debt, then we will necessarily see savings rates rise. Rising savings rates will be a deflationary force, and further weaken the Fed's interest rate lever. Using Japan as a model, the Fed's only response will be to flood liquidity and the government's only response will be to run deficits which make today's look like fiscal responsibility (Japan ran over 100% current to GDP, and still is).

And, if the US Citizen persists, and refuses to consume on debt, then the all this would have to spiral into a deflationary depression. Like you, I think we learned that lesson and it won't be repeated for a long time yet to come, if ever. As such, the government will spare nothing to stimulate consumption, even if it means mortgaging another 10 future generations.

I do agree, although I'm not happy about it, that the US is very likely to entrench, isolate, and disconnect. If we turn inwards, we can escape the worst effects of our global debts, and maintain a minimum of 4/5 of our standard of living. In reality, we'll maintain much more because in a world absent of US "strategic participation" (purposefully ignoring political implications and arguments), the US will become a de facto haven from risk. Compared to the EUR, the USD will look like a 0-risk proposition. Keep in mind that as the US pulls back, and closes off the borders, and stimulates local production, our consumption demand for global products falls, and places like Europe, China, India end up in a world of shit. I hope Europe is ready to welcome their new largest strategic trading partner, Russia, in such a future.

I still go to open homes every now and then. But what I see are a bunch of looky loos like myself. Even a very nice property in the East Bay that I thought would have an offer, didn't get any. So all of you should have faith. My faith that the housing market will decline grows stronger every day. I've kept track of certain homes in the east bay from Hercules to Berkeley, they are all staying on market longer than last year and most are not getting over asking. I wish I had all the numbers for you guys, but I'm not as much of a data hound as some of you.

Robert,
I totally agree with your assesment that there will be a debtpression. Reason being the simple and indisputable fact that the avg american saves -0.01% of their income. How in the hell a country functions on zero available funds can mean one thing only: Debt has/is being used as currency. All you have to do is drive around Oakland and see all the brand spankin' new Hummers and Escalades with another 20k in " enhancements" to realize that borrowing has been such a part of the American consumer environment for so long that most people who borrow for items they cannot really afford fail to realize that yes indeed- someday they will have to pay all that back plus another 30% in interest.
The most ironic part of the RE boom is that the frantic desire to be " normal" homeowners has actually caused a reverse of the end goal and created an entire generation that will know nothing about savings. The homedebters of today will probably feel less secure than anyone who just rented and waited things out. A rental can always be swapped for a cheaper rental. A house can just as easily go back to the banks.

What if the most egregious offenders of THIS bubble also correct — San Diego, Phoenix, the end of double digit returns, some lending reform, etc., but we’re left with a permanent premium similar to the tech stock premium — let’s say housing costs fall from 9 times incomes, but fail to return to the 3 times income historical mean, and settles upon 6 times incomes? I don’t think this is outside of the realm of possibility at all. And it would suck.

Red Whine,

This very scenario has been the topic of more than a few discussions here, and my impression --as far as CA is concerned-- is that NIMBY anti-development laws, outrageous six-figure "just because" fees slapped on new housing, and Prop 13 have so heavily dis-incentivized residential building here that supply will remain suppressed for the long run. Add to that an unabated flood of illegal unskilled slave labor (but Congress is going to "get tough" this time --yeah right!) and you have continued strong housing demand --mostly on the low end. For these reasons, I'm convinced CA median prices will never return to the 3X HH income ratio common in other states. It's not beyond the realm of possibility, however, for it to fall to 5-6X HH incomes (it's currently about 12X).

As far as CA "equity nomads" and their toxic loans contaminating other markets, we're already seeing this, especially in nearby states like AZ, NV, OR & WA. The question is, will this effect persist once CA housing begins to crash? Personally, I doubt it. The toxic loan liquidity is already in the process of drying up. As Robert Cote pointed out, sane lending standards have a way of returning in a credit/asset bubble's aftermath. And as long as most other states do not make the mistake of copying CA's idiotic regulatory housing model, they won't kill their ability to produce supply adequate to meet fundamental demand.

Face Reality, welcome back. Can you stay around?

I still think that worse homes in worse area will correct significantly. I may be adjusting my outlook on better homes in better areas.

The best way to fix Prop 13 problems is to do away with property tax altogether. It should be reformed into a consumption-based taxation. Owner-occupants may be asked to pay consumption tax on the rental equivalence instead.

BTW Face Reality, I’ve seen your tone get outright nasty over at the Craislist forum while your tone here is substanitally more subdued. Care to explain your split personality?

The Craislist forum is just nasty anyway.

tannenbaum ,
Exactly! I've noticed this for almost a year now. I can rattle off at least 6 or 7 houses around us that have come up for sale, pend, even sell sometimes, then come back up within a month or two. Most often, it appears that the owner gets fed up with their realtor and hires another company.
The stupid thing is that I've never seen one of these homes go up for less. It makes no sense to take it down and relist thinking that buyers give a rat's ass about who the realtor is.

I quit going to the CL forum a long time ago. Like a bunch of 12 year old kids brawling all the time.

I still believe (like most people I know) that prices will hold well in decent parts of the BA. Appreciation will continue to slow down or even stop for a while, but that’s about it. This is what I’ve been predicting ever since I first posted on this blog a year and a half ago.

@Face Reality

Good luck to all the recent home-"buyers" with praying for inflation to bail them out. At today's inflation (if we use the government's CPI of approx. 3.5%), it would take over 20 years for rents to double, thus achieving parity with PITI+maintenance-tax deduction on a house, using a non-toxic amortzing FRM. Even if we use "true" inflation (closer to 6%), it would still take nearly 12 years.

Oh, and welcome back :-).

The most important thing that I look at is how much the house actually sold for compared to what the same house or comparable houses sold for in the recent past. I don’t see any weakness in the prices that properties actually sell for.

Check out SD & Sacto. Plenty of examples there. The Bay Area? Not a whole lot of examples --YET. But we are just entering the beginning of what may prove to be a very looooong correction phase.

Yeah,

I don't who that guy calling himself "DinOR" is over on Ben's Blog but he says some pretty wild stuff. Kind of like all those R+B and motown groups out there billing themselves as "The Drifters" or "The Platters" but don't even have ONE original member! Ugh, I hate that.

Uh, BB is on TV talking and I can't hear what he's saying but it must be really bad b/c the market is trading down. Does anyone have a TV w/sound?

Oh, wait a minute? He's talking about the Housing ATM Machine (without actually calling it that of course!)

HARM,

Good luck to all the recent home-”buyers” with praying for inflation to bail them out. At today’s inflation (if we use the government’s CPI of approx. 3.5%), it would take over 20 years for rents to double, thus achieving parity with PITI+maintenance-tax deduction on a house, using a non-toxic amortzing FRM. Even if we use “true” inflation (closer to 6%), it would still take nearly 12 years.

This is the thing that got me in trouble with some folks on the last thread.

Your calculation is wrong. It is NOT LINEAR. The "gap" closes faster than that because of the iterative nature of the interest tax shield, the time-value nature of the alternative investments, etc. This is basic finance stuff, yet I'm being cast as some kind of obscufator for pointing it out.

Of course you shouldn't use a NAAVLP. But, for those who can afford a traditional 15 to 30-year fixed and have a 20+% downpayment, the gap takes around 7 years to close, not 20. This is because of the way the "curve slopes". I think this is all Peter P and I are saying. The psychology driving these buyers is very different than what's buying desperate FBs or "you shouldn't be buying anyway" (from a financial perspective) people.

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B7B78F4E8%2D5F4E%2D4193%2DA831%2D23ED7B25F3EC%7D&siteid=mktw&dist=

BB talking tough on inflation.

SQT,

"Well, apparently faith isn't enough"

There are a number of "lows" in life but this has got to be just about the WORST! Hoping your sale doesn't "fall through" is a LOT like praying! At least she admitted it (unlike many FB's trying to bail).

I feel for your friend, really I do b/c she probably realized they couldn't afford it early on and put forth an effort to get the problem corrected! We'll be hearing a lot more of these stories in the near future and they will spread from Sacto (which I never made any predictions about dropping btw) to many more areas. Although it makes you wonder? Why was this couple so desperate to sell in the first place? Didn't you say they just bought it last year? Like George says, the ones that bail early will be the lucky ones.

Why do I think wages will rise, because of imperfect-information theory of sticky wages. Wages are sticky, but the do not empirically abide by the predictions of Keynes' General Theory. In fact, wages almost always rise with GDP and employment, but lagged and dampened.

There are only 4 statistically valid and material counterpoints to this correlation in US data: all of those immediately after stagflationary or stagnant periods. This supports John Haverty's claims of stagflation (albeit, circumstantially and ex-post). But (and this is the big but), every one of those data points was followed by a dramatic RISE in real and nominal wages during the subsequent period, which was itself a deep recession.

There are no examples of wages falling for any period of time without these correlations holding.

So, who is it that claims we're in a "new paradigm" and "everything is different this time"? If fundamentals are fundamentals, then wages must rise. I'm just a stickler for consistency. If we insist real-estate is bounded by fundamentals, and it's not different this time, then the same is true of all the well studied and empirically demonstrated wage econ theory.

(Of course, someone will say: "outsourcing, offshoring, wage arbitrage". Maybe this is right, but at least admit you're arguing for a new paradigm that hasn't happened before, yet you deny a new paradigm for other things.)

Also, rent increases in SJ appears to be higher than the 8 - 10% range. This is apartment rent though. I do not follow private landlord rentals.

Look we can even go to burger king and buy two double cheeseburgers for two bucks, man, who can beat that?

But sushi prices are on the rise. :(