Soft Landing? Depends on what you consider SOFT
Chuck Ponzi April 21st, 2005
Now that the real estate tide has begun to turn in San Diego, we have all been hearing a lot about how real-estate economists are predicting a housing “soft landing”. Here is an article that describes the March slide, and provides pundit John Karevoll, a DataQuick analyst, the opportunity to open his mouth and insert something. One thing that he is right about in the article is that, “We’re seeing all the signs we’d expect to see when we near the end of a cycle, with growth in the market receding a bit.”
Personally, I found the idea of a “soft landing” to be totally preposterous, it is like those people who ask you to walk calmly and slowly to an exit in the middle of a theater that is completely ablaze…mob mentality only takes a little while to take over before you have people trampling each other to get out. Anyone remember the shortage and following glut of cabbage patch kids?
Still, I wanted to graphically represent my beliefs and show how truly unbelievable their rationale is. First of all, several assumptions are made about the current situation in San Diego. I tried to find the most conservative source of information for determining what the “correct” price for a San Diego home should be. I found it with ConsumerReports.org. With fact-based analysis, and a penchant for conservatism, I find them to be thoroughly believable when purchasing anything from a car to a baby seat. They report that in San Diego, the “Actual” price for a home was $417,900, while the “Affordable” price is $266,600 in 2004. Also, to be as conservative as possible, and based on factual research, one would expect that future inflation would tend to mimic past inflation, and that the correct or affordable price would increase by 3% per year, which historically is closer to correct home appreciation. Also, I considered that a “soft landing would be an increase of home prices at 1%. Now, most homeowners would laugh at that return, it just would not be enough to keep them there, but anything higher would prolong the return to affordable or correct housing prices. I have inserted a graph extrapolating from the 2004 numbers forward considering these variables, and measured when we would be able to come back to an affordable price.
A “Soft Landing” For San Diego 
Does it surprise anyone that it would take 22 years, or not until 2027 would we see the “soft landing” end? That’s hardly soft in my opinion. Better we take the hit now and get it over with.
I reran my numbers to be a bit more aggressive, and used 3.5% increases and 4.0% increases for inflation/affordable home price appreciation, which historically is unprecedented, but came up with 16 and 15 years respectively, to return to baseline.
The conclusion is this. Either 1. We take a hit now when investors panic and run for the door, or 2. Investors accept a protracted expectation of diminished profits over the following 20 years. With all that my parents (baby boomers) have experienced in various markets, I doubt that we will see #2 happen, since most of them would be dead before they could retire. I trust the numbers that Consumer Reports publishes, and believe that over the next 3 to 5 years we will see a downward price adjustment (read: bubble) to deflate prices about 28% (nominal) from current prices. This is calculated by taking the future corrected median price 5 years from now assuming 3% increases per year and plotting that against current price levels. Will the prices go below that number? It’s possible. People love homes, but banks love getting their money back more. We will see a tightening of loan applications in the next year after huge scandal arises from loan fraud both on the brokers’ and buyers’ parts.
Karevoll is nothing but a cheerleader for the real estate lobby. I take anything he says with a grain of salt, although, if you read between the lines, it looks like he thinks things are over in San Diego, as they should be. As for a soft landing, I think that’s a pipe dream. I have been through the last 2 booms here and they both ended in busts.
I don’t know how a soft landing is possible. If prices go down a little bit, the speculators stop buying and will want to sell the property they already have, creating even more supply and less demand. Plus if house sales go down and interest rates go up, people lose their home ‘ATMs’ and half of the new real estate jobs created in CA go away. No, an initial decrease in prices will only send us into a downward spiral.
Fed talking soft landing too. Federal Reserve Board Governor Donald L. Kohn said:
Even so, such a distortion would most likely unwind through a slow erosion of real house prices, rather than a sudden crash.
Fed Governor Speaks
Mr. Doe-
Great analysis (and scorn).
Regards,
Professor Piggington
In previous article you said you have ton of money in the bank and waiting (just like me) but you mentioned “few years”, do you really think it will take few years? im shooting for winter ‘06.
Can you write on what will “Bernanke Effect” tdo to real estate and our dear bubble?
Good Stuff, Joe. I have been thinking a lot about hard and soft landings too. Some claimn that because there has ‘never’ been a hard landing before, there won’t be this time. Well, even if there ‘never’ has been a hard landing before, it is hard to compare this bubble to previous ones because this bubble is way off the scale of previous ones (See Shiller for proof of this.)
VHB
I think I commented on everyone’s questions in my most recent blog. Please check it out!
Housing bubble can burst just like the stock market, a good example is the Hong Kong market, it fell 65% from 1997 to 2003 (it has nothing to do with the Communist Chinese took over), and finally just start raising again . Even though the these are 2 completely different cities, there is a lot of parallel between the Hong Kong market and the San Diego market, such as oversea investment and developers from Canada and Australia.
However, gambling (hmmmm… investment) is the city wide (and for the Chinese culture as a whole) favorite past time, and many of us like myself that grown up there has seen all the extreme ups and down of the stock and real estate markets since the 70s. I used to stand in line overnight outside of developer sales offices with my parents to buy a couple of condo that will be sold in a few months for lots of profits.
Here’s a fairly long article about the recent raise on property price again, the article mention the decline on the second page, and for those of you not familiar with the exchange rate, USD$1 = HKD$7.8
http://www.iht.com/articles/20.....hong22.php
One thing that is really sad is that there were people committed suicide in the late 90’s they lost all their money. My parents were lucky, the only time they lost money is when they sold the house they lived in for 10 years in Vancouver (Canada) when they move back to Hong Kong in 2002, they are retired now and living in a comfortable flat on the 45th floor (the building is 60 levels) of a huge complex bought at rock bottom price in 2002.
If the speculators go away there won’t be speculators to buy from these speculators. Most people don’t realize the double edge sword of this:
Not only to you get a glut of new listings but a dramatic decrease in buyers simultaneously.
I plotted the OFHEO MSA House Price Index for san diego (use
http://www.ofheo.gov/HPIMSA.asp?FormMode=Process). What I noticed is that it only took 1 year to go from + to - MSA. The negative appreciation lasted from mid 1990 to
mid 1995. I suspect the drop will
be faster this time (i.e., only taking 3 quaters to go from + to - MSA) because this market has less inertia (resistance) due to a unprecedented number of speculators.
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