Chuck Ponzi January 19th, 2006

Every once in a while, we come across a new theory about the Southern California Real Estate market that is not widespread in its beliefs or has not yet caught momentum.

It’s always good to review others’ blogs to grab the cutting edge; sometimes comments are the most telling of all; those who have a flash of insight and care to write it down sometimes stumble upon something.

As I was reading a post that MISH over at Global Economic Analysis made the other day about the dramatic Centex One Day Sales events, my interest was piqued by a writers’ comments. You can find the original link here.

Right now, there are a lot of bubble watchers who want to get in during a so-called “correction” phase. These guys have cash on the side and they fundamentally believe that it’s a good thing to be a homeowner whereas the really astute individual realizes that a home is just that, a place to rest one’s body than an asset class like precious metals, AAA bonds, blue chip equities, etc.During the soft market of 2006/2007, a lot of these people will be getting into properties, discounted at 15-20%, thinking that they’d beaten the system. Afterwards, the overall volume of buyers will disappear and these individuals will also be stuck in properties that they, themselves, can’t sell if their company relocates or they loose their jobs.That’s when we’ll see a crash, ala 40-60%, down from 2000/2001 prices and the end of real estate as an asset class. It’ll revert back to a depreciating asset, much like a used car but with a steadier bottom of 30-40% of original list price up until the economy
starts to produce real jobs and then real estate can go back to being an inflation hedge but that’s perhaps another 12 to 15 years away.

Should we agree with his assessment?

Well, let’s rethink this a little bit. We can read a few assumptions into the mind of the writer.

First, his assumption is that there are a lot of people waiting on the sidelines with lots of cash ready to buy at current prices.

How much credence should we lend this theory? While we don’t have any statistics available for us to determine if any of this is true, this makes this a weak argument. While homeownership rates are at their highest they have ever been, and with taxes fairly substantial, many people are already homeowners. In fact, much of the premise of a housing bubble is built on the belief that it was predicated on the easy lending policies in the credit markets. It would be a hard sell that there are MORE people waiting on the sidelines that simply decided not to buy than already bought more than they could handle. You would also have to assume that builders will not try to build their way out of declining profits and slashing prices (Centex proves they will do just that)

Second, another assumption that he makes is that homeownership is primarily a lifestyle choice.

While I am certain that some individuals feel this way out of necessity, I would argue that there is a very strong and very real societal bias towards homeownership. Exclusion from certain groups, fear of being viewed as financially insecure, and fear of missing out has pushed record groups to buy homes. In addition, most would find that homebuying is related to I would say that this is not as likely.

Third, he assumes that purchase decisions will be nearly instananeous, and therefore the near-term future is difficult to predict. If homeowners fear prices are going back up, they will just buy immediately.

I would have to disagree if this is an assumption. RE transactions are notoriously slow and fraught with incompletions. I’m not seeing this one.

Because of the illiquid nature of the market and sticky prices, it would seem that we should expect a slow descent for a year or so with increasing momentum to the downside for several more after that. Perhaps the writer would attribute that to bubble sitters getting back in, but I’m inclined to believe that no one will wait out the entire pop to buy. Since it could easily take 6 or more years to fully deflate, a 28 y.o. could be 34 or older by the time they would be buying back in. That’s a lot of time to be sitting out of the market while their wife nags about it. While some would have that patience, it’s not likely that many of us are of the same mindset.

We will have to wait and see what will come of the next few years, but it seems pretty likely that 2006 will be a slightly down year from ‘05 prices, and ‘07 will quicken the pace.

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