patrick.net

Correct me if I'm wrong but in the 1970's the leading edge of about 70 million baby boomers were starting to go into the housing market. In the 2010's they are starting to exit the market, looking to downsize (who the heck wants to live in a mcmansion at age 75), going to retirement homes, or dieing. Many have already bought their retirement home during the boom, providing they can hang on. Most of them are dramatically underfunded for retirement with their house being almost their only retirement asset, putting on even greater pressure to sell.

The median age for boomers is 53 with the average lifespan being about 75. For the next 20-30 years baby boomers will die much faster than immigration/births will replace them. This is almost 25% of the current population of the entire country that is simply going to disappear in the next 30 years. People in their most productive years. Do to our insane immigration policy which favors family in the country over all other factors, they will be replaced with people who are not only at the bottom of the chart, totally lacking in education or marketable skills, but many who are actually not capable of working at all.

These are irrefutable demographic facts. So exactly where are the buyers for this approaching tidal wave of homes for sale going to be coming from??

Something I have noticed while looking a houses to buy, people over 65 are selling (trying) at a record rate in the San Antonio, Texas area. I think they are hoping to get some money out of the sale.

Short of having your house paid for and willing to deal, they are not selling. I have seen properties on the market for a year plus and still no sale.

The seniors thought they were going to retire on the equity. Oh well.

people over 65 are selling (trying) at a record rate in the San Antonio
the Silent Gens final act is going to be hosing the Boomers. I'm guessing the seniors will be next to join the Coalition of the Willing in the Bay Area. Could get quite interesting if they all decide to head for the exits (the more sensible ones have their houses paid off, so any price will put cash in their pockets versus overleveraged Boomers.) Calling surfer-x...

I'm 38 y.o. and I can't tell you how many of my friends, especially in the Midwest, were telling me about the vast amount of equity in their homes and how it was going to be their retirement 'egg' just a few years back. I'm afraid to bring up the subject these days. I just hope they have a Plan B!

"Housing goods are still priced well above the cost of providing them."

If that were true, then homebuilders would still be building like crazy, undercutting the existing home sales. But they are not because they can't. Instead we have existing home sales in the millions (not far from previous precord levels), while new home sales have collapsed to under half of one million units.

"What happens to rents when wages are flat in real (and perhaps even nominal) terms, food goes up, gas is $10/gallon, taxes go up, health insurance goes up?"

I agree that housing budgets will be cut more than food budgets if real wages fall. Both will be cut. If wages decline in real terms then people will buy less of everything, as they did in the past, before real incomes rose. Fifty years ago people spent far less (in real terms) on everything - housing, food, clothes, etc. So people will cut out the less needed items - the luxury portion of their spending in each category. In housing they will downsize and forgo granite etc. This would lead to simpler smaller housing and reduced consumption of all luxury goods.

Leigh says

I’m 38 y.o. and I can’t tell you how many of my friends, especially in the Midwest, were telling me about the vast amount of equity in their homes and how it was going to be their retirement ‘egg’ just a few years back. I’m afraid to bring up the subject these days. I just hope they have a Plan B!

I had friends telling me the same. They all tried to convince us to buy too. Now we just avoid the housing topic.

Since the CS reset chart is headlining this post, it might be a good time to point out that Wells is getting religion with respect to their Wachovia portfolio. From the WSJ; also, Bloomberg did a recent piece on the phenomena.
The San Francisco company is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years... The move to shift Pick-A-Pay borrowers into interest-only loans helps Wells Fargo avoid hefty write-downs on Pick-A-Pay mortgages that would likely result from foreclosures.
The big question is whether they are doing enough to head off the ruthless defaulters (at this point, they appear to be splitting the difference with the mortgagors):
Danny Annan, an Orange County, Calif., engineer, said Wells Fargo recently offered to reduce his loan balance by $100,000 and transfer the remaining balance to a six-year interest-only loan with an initial interest rate of about 4.9%, Annan said. The offer will leave Annan more than $100,000 underwater on his home.

Zephyr says

“Housing goods are still priced well above the cost of providing them.”
If that were true, then homebuilders would still be building like crazy, undercutting the existing home sales.

Where there are jobs, there is no buildable land. Where there is buildable land, there are no jobs.

Note what I asserted:

“Housing goods are still priced well above the cost of providing them.”

What is the cost of production of an existing home? A coat of paint and new carpets, plus the annual property tax bill. The nation has 20 million vacant homes now. We have a housing glut of existing stock.

while new home sales have collapsed to under half of one million units.

New homes are far away from job centers and have to compete with existing stock, much of it good enough. $4 gas last year also put the fear of G-d into those contemplating being long-distance commuters.

So people will cut out the less needed items - the luxury portion of their spending in each category. In housing they will downsize and forgo granite etc. This would lead to simpler smaller housing and reduced consumption of all luxury goods.

And less jobs, less income, and less money to spend on housing. Anyhoo, it's not the luxury improvements that are "luxury", it's the site value component that is making housing unaffordable. Ground rents are TOTALLY out of the control of landlords, unless they possess monopoly pricing power (some do).

Edit: I realize I'm being rather dogmatic on this point and could be entirely wrong. Wage increases may come from J6P being pressured on all sides. It is a fight between J6P's employer and landlord as to who gets the most value from his labor.

New homes are far away from job centers and have to compete with existing stock, much of it good enough. $4 gas last year also put the fear of G-d into those contemplating being long-distance commuters.
I caught this episode of Patchwork Nation on the News Hour last night. It really highlights some of the points your are making.
If you look at what Eagle's population does for a living, a large percentage are builders, there's no doubt about it, in the construction trade. They were doing the two-year flip, so, tax -- you know, save tax money. Someone else would move in. They would build another house, and continue that cycle. The people that have been really hurt were the ones that were in that cycle, did not -- next thing you know, they own two homes, a couple lots, can't afford the payments, can't sell the homes.
Eagle County's boom was built on recession-sensitive businesses, housing and the resort industry. It's unclear whether Eagle and towns like it have learned anything from this downturn and can grow other industries to avoid the boom-bust cycle in the future.

Troy,

You said: “Where there are jobs, there is no buildable land. Where there is buildable land, there are no jobs.”

Yes, that is generally true. This means that population growth will require longer commutes or more housing density. Both factors will raise the relative value of land and existing housing located closer to the jobs.

“What is the cost of production of an existing home? A coat of paint and new carpets, plus the annual property tax bill.”

I suppose you could claim that, just as you could claim the “production cost” of anything already produced is close to nothing. The relevant comparison is replacement cost. And that is local labor costs plus materials, plus the lot.

The replacement cost of a structure is largely a function of current local labor costs and material costs (plus a time preference value). It is the land that fluctuates most in real price over the cycle, and in the long run gains or loses real value as its environment becomes more or less desirable relative to other choices.

I agree that we have a glut of homes, because of overbuilding. It will take a few years to absorb the excess supply. And homes in the hinterlands are an inferior good, and will be the last to be absorbed.

“Anyhoo, it’s not the luxury improvements that are “luxury”, it’s the site value component that is making housing unaffordable.”

It is both. But the site value is very cyclical, and has dropped significantly to the current cyclical lows.
Housing has become very affordable in most places today. In most of the country housing is more affordable today than it has ever been. This condition will not last. A combination of rising prices and rising interest rates will soon make housing less affordable.

We are experiencing a cyclical low in the costs of many goods including housing. As the economy recovers prices for most goods and services will rise. So, everyone should enjoy the lower than normal prices while they last.

Zephyr says

Housing has become very affordable in most places today. In most of the country housing is more affordable today than it has ever been. This condition will not last. A combina

More affordable than ever? Most of the country? Are you sure? That's not the way I read the numbers at all. The ratios of prices to rent and income still doesn't even approach historical norms in most of the country.

Cyclical low prices following a bubble bust can last a very long time as proven time and time again in history. Housing may not recover for decades. Look at a chart of real estate in Japan for the last 25 years. Drops from 90% in residential to 99% commercial real estate in Tokyo alone where there is most certainly no new land available.

For anyone buying a house as shelter for the long term none of this matters. But people thinking of jumping in the market as an investment (other than insiders doing illegal deals who are already cleaning up) are going to get creamed.

bob2356

The boomers will not die faster than the new births and immigrants replace them. The population of the US is expected to increase by roughly 100 million people over the next 25 years. So, real demand will grow.

And those who replace the dying are always from the bottom of the ladder, and they work their way up. All the people in the middle move up slowly as the oldest retire, and then die.

The replacement demand is already walking among us.

Zephyr says

The sky has fallen as far as it is going to fall.
The bottom is behind us for the lower third of the market.
The middle market is bottoming now.
Higher end home prices will keep slipping during 2010.
With all the wild government spending and Fed printing of money, inflation is coming. The lower end market has been rising for a year now. We will never see those prices again. Ever.
There is more pain remaining for many. But, the end of the world has passed.

Huge generalizations. It all depends on where you are. In my neighborhood, the sky is still falling because it has hardly even started to fall. In Detroit, it can't be beaten down any more (I saw houses for less than $500 on BoA's REO web site).

It's very local. San Jose has four or so new high rises all at less than 20% occupancy. Were asking $500,000s and now $279,000 and still not selling. Houses that were $6-800,000 are now asking $4-500,000 (still too high for many n'hoods). Up the penninsula, $1 mil is now $800,000, which is still out of reach to most potential buyers withOUT the mortgages of the past. Investors don't buy these as rentals because rents won't support their costs (without 1/2 mil down). But it is creeping closer and closer to my neighborhood.

Most boomers are indeed under funded for retirement (as are all age groups).

The “plan B” will be working longer before retirement, and spending less in retirement. Unless, of course, if they can get the government to give them more (at everyone else’s expense).

Zephyr says

Most boomers are indeed under funded for retirement (as are all age groups).
The “plan B” will be working longer before retirement, and spending less in retirement. Unless, of course, if they can get the government to give them more (at everyone else’s expense).

Forget about our generation having an opportunity to retire. We are in for a toughest 10-15 years of our lives. Pardon my pessimism but that seems to be a reality. We have to give back the last 20-30 years of artificially credit generated wealth.

Bob,

Affordability is a primarily a function of monthly cost. And at current interest rates and current housing prices, the monthly cost of buying an average house is lower than it has been in any year prior to 2009.

The simple ratio of price to income is too simplistic. It must be viewed in the context of prevailing interest rates. I remember buying properties in the 1980s when mortgage rates were double digits. The affordable price to income ratio was much lower with a 14% interest rate, compared to less than 6% today.

If you double the interest rate, then the average buyer can afford only about half the price. So the price to income ratio must change accordingly.

Dadab,

The problem is that people bought big screen tvs, big SUVs, fancy vacation trips, restaurant meals and bigger fancy houses with the money that they should have been saving for retirement.

Foolish is as foolish does.

Illness and disability will force many (most?) to retire before they expect to.
They will live a modest lifestyle in retirement.

If your home is paid for you can be comfortable on Social Security - if you are not an extravagant consumer. My 80 year old mother lives well spending only her Social Security income. She has plenty of other money, but never needs to use it.

Zephyr says

The sky has fallen as far as it is going to fall.
The bottom is behind us for the lower third of the market.

The middle market is bottoming now.

Higher end home prices will keep slipping during 2010.
With all the wild government spending and Fed printing of money, inflation is coming. The lower end market has been rising for a year now. We will never see those prices again. Ever.
There is more pain remaining for many. But, the end of the world has passed.

Great post and great follow~up posts, Zephyr.

I've purchased a few income properties in the past year and it seems as if more and more investors are coming into the market and the rock~bottom bargains are now a thing of the past (I'm speaking of low~end income properties). I'm an all~cash buyer but I'm not the only one out there. Seems as if quite a number of people were waiting on the sidelines to buy, or were able to sell off their portfolio prior to the collapse. I sold my investments a bit prematurely, 2004~~~but then I bought everything between '95 and '96 so I have lots of cash to play with.

It’s very local. San Jose has four or so new high rises all at less than 20% occupancy.
I saw on the news last night Alum Rock was closing schools. We having rising enrollments in our part of the East Bay, though. The Urbanization Shift appears to be picking winners and losers, although I still think even the winners will be facing a world of hurt.

compared to less than 6% today
Watch out for that deflation, though, real interest rates are higher than you might think. Well, at this point, I'm being somewhat hyperbolic as it appears CPI is headed back up (slowly).

WillyWanker,

Yes. You are on great path. Good luck to you.

I am also one of those all cash buyers.
And I have been waiting a loooong time for this market.

In 2003 I decided the prices were geting too high, as nothing looked good to me. In late 2005 I decided it was time to start selling. I did not sell everything (I wish I had). This year I started buying again (as I did in 1998 to 2003, after selling in 1989).

But I also play the market cycle in stocks. I sold almost everthing during 2007, mostly in the third quarter. One year ago I started buying stocks again, especially during the first quarter of this year. So far so good. I did the same thing in 2000, getting out before the market declined, and then buying back in during March of 2003. I like to follow and speculate on market cycles. And it has worked well for me for about 30 years now.

It is interesting to see so many people buy at the top, and then sell at the bottom.
During the bubble they think prices will never fall.
At the bottom they think that prices will never rise.
But it is cycle that keeps repeating itself.

"...as it appears CPI is headed back up (slowly)."

Always slowly at first.

Commodoties first, then goods, assets, and nominal wages.

The Fed has dramatically increased the money supply.
That will transform into inflation before long.

The Fed has dramatically increased the money supply.
The bubble vaporized a lot money. While I don't exactly sleep well with the Feds balance sheet hovering around $2.1 trillion, I'm not going to worry about the specter of Fed induced inflation until they hit $2.8 trillion. Commercial RE is the last to go, and, at least in my neighborhood, it's providing quite a spectacular show.

that graph looks like a double-dip recession. I hope TPTB have learned to "Just dip once and end it"

"The bubble vaporized a lot money."

Mostly it just transfered money from the buyers (and their lenders) to the sellers at the top of the market. Unfortunately many people lent money to the buyers so they were the real losers. But all of the "lost" money went to the sellers, and also to the people who sold other stuff to those borrowers who used home equity loans to buy stuff.

I agree that commercial RE has much pain yet to come.

Zephyr,
The vaporization I'm referring to (which, I'm pretty sure you understand) is the gigantic, gaping hole on the banks balance sheet (which is all a bit ethereal, as the money for lending was willed into existence by the miracle of fractional reserve banking). A lot this 'created' debt was then securitized, and, conveniently, has found a home at the Fed (to shore up the banks capital ratios).

notice that its all timed to end on 2012!

Dec 21

Yes. The money vaporized from the perspective of those who lost it, for sure.

But the money actually went to the parties on the other side of the bad investments made by the borowers. So when I sold at the market top, I got money that the buyers borrowed, and now cannot repay to the bank. So it did vaporize from the bank's balance sheet, but I still have it. The bank has lost their ability to collect it from future income of the borrower. But the bank no longer had that money once they lent it to the borrower, and he gave it to me. So the vaporization was really a transfer. But nobody is following the full path of the "lost" money.

EBGuy,

Every dollar lent out by a bank had to first come into the bank as an actual dollar deposit (or investor capital). Banks do not "will" money into existence. Fractional reserve banking is a restriction on lending that limits the total of all loans to a ratio based on deposits.

Banks are limited to lending only 90% of their deposits. When that money gets deposited back into the bank, the bank can lend 90% of that same money out again. Ultimately this process can result in the bank having lent the same money many times over. But the bank also owes the same money to many depositors many times over. The net effect is that the bank has the same net worth that it started with (before receiving interest payments).

The official money supply measurement does not subtract for the various loans, and counts only the deposit side of the bank balances. It is a gross accounting, not a net accounting. So the real net value is not known, and not reported. The effect is that the money supply counts that same dollar like a new dollar every time it is deposited. So the recycling of the same money increases the measurement of the money supply. There is no magic, just incomplete accounting.

Zephyr, you still have not answered my question: how will the option ARM resets, shadow inventory, increasing NODs, horrible unemployment affect prices? how can you say prices have bottomed if the inventory is held back???

HOW WILL the prices be propped up?

Serpentor says

HOW WILL the prices be propped up?

My ideas:

2.5% fixed for 50
10 year 1% IO balloon loans
Change the tax deduction to a tax credit
Wage inflation resulting in the median wage moving to $80,000.

Are of these are entirely possible, none likely IMO

It is true that we will see high interest rates if & when "inflation expectations" (FedSpeak for wage inflation) returns. As I've stated ad infinitum here recently, I don't see J6P having much bargaining power WRT wages this next decade and compression is the order of the day. Zephyr says consumer spending on luxuries will take the hit, which is possible, while I think/hope land values will (instead).

Zephyr says

So the vaporization was really a transfer. But nobody is following the full path of the “lost” money.

This is an important point and explains the hot money on the sidelines looking for deals right now.

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

But the bank no longer had that money once they lent it to the borrower
No, but they had the debt. And debt=money when you can securitize it and get it off your books. But you already know this (I think). We would not be in trouble (just a lot poorer from real wealth transfers -- which is what you refer to as the 'lost money') if the banks had securitzed (and sold off) everything. Quite a paradox; the problem was, they drank their own KoolAid and either kept some on the books or bought MBSes as investments.

I just read your most recent post, and, obviously we disagree -- I'm going to feel quite silly if you're correct (but hey, I'm teachable). I assert (with a 10% reserve ratio) that for every dollar deposit a bank takes in, they can lend out $9 (which is created supply). You say they can only lend out $0.90 (with dollars having to circulate through the system, redeposited in the same or different banks, many times to hit the 9x multiplier). Yours is definitely more sensible, but not my understanding (I'll see if I can find something from the Fed's website).

EBGuy says

Yours is definitely more sensible, but not my understanding (I’ll see if I can find something from the Fed’s website).

http://en.wikipedia.org/wiki/Fractional-reserve_banking

EBGuy,

Remember that assets must equal liabilities (even in bank accounting).

In bank accounting the loan is an asset (money owed to the bank),
and the deposit is a liability (money owed to a depositor).

I personally know people that have made hundreds of thousands of dollars in the stock market since March Lows... The scary thing is that they are still Ultra-bullish.. And see the Dow quickly going back to 14,000 and beyond in the next year or 2.

I'm very skeptical of this since it makes no sense for the bubble to re-inflate so quickly... If that actually happened than people who went into a coma in 2006... would awake in 2012 to a fairly hefty profit margin. I find that hard to believe that someone asleep at the wheel would gain so much in a corrupt market.

Everyone under water on a home loan right didn't release an equal seller who sold at the top of the market. Many people (idiots mostly) borrowed against their house like it was a second job, so follow the trail of lost money to the car depreciating in the driveway and clogging up the garage.

"...so follow the trail of lost money to the car depreciating in the driveway and clogging up the garage."

The money went to the seller of the car, in exchange for the car.