Do some research first….early 90’s = unemployment and interest rates averaging around 8%! Did I mention the overbuilding that took place in Southern California in the late 80’s.

You’ll be surprised. Most homeowners still FIRMLY believe appreciation will continue albeit at a slower rate. I don’t argue with these people anymore because they are SO touchy about the subject. A debate about Real Estate trends is enough to make normally calm people start to get extremely agitated.

How dare anyone question the value of their magical home which has been the panacea to all their financial insecurities?

Foreclosures are on the rise but homes sent to auction are just starting to go back to the lender. That’s when things will really change.

I think most will agree that the mood in real estate is shifting drastically from even six months ago. Most people won’t start waking up until they see the year over year numbers are in the red. We’re not far off.

For instance if you see the current listings at Countrywide foreclosures or BOA foreclosures some of the asking prices are about market value. If foreclosures reach an unmanageable point (may or may not happen depending on various factors including future appreciation, interest rates etc.), they have no choice but to undercut prices and get what they can. Buying foreclosures is always a tricky proposition because many of the homes are in disrepair so buyer beware..make sure you have the best realtor around to guide you through the process.

there was an article in the wall street journal a month ago about a woman in the DC suburbs of virginia who had to sell her home quickly. she had no takers so arranged an auction. her house, which was appraise for $1.1 million sold for $570,000. my point being, if banks are going to wind up auctioning these properties that they take by foreclosure, prices will be driven down hard and fast.

am i wrong?

Also, an inverted year is VERY unlikely. If we’ve been flat all year, you can expect pretty much the same or less at the end of the year.

Even if the Feds lower the interest rates, we will most likely not see prices recover. How many of you have friends with ARMs? They signed on the dotted line because they just knew in the heart that in five years that their home would be worth at least 100K more then what they paid for it. With billions about to hit their first adjustment, we should expect many more foreclosures to hit the market. San Diego is having a terrible time now but it should expect more rough times once foreclosures enter the market.

I mean, that’s the nice way to look at it, and it gives him the benefit of the doubt. some people on this board seem to think he believes that prices will plummet but is saying the opposite. that casts him in a bad light. He might really believe this crap. He might be a really not smart guy, who doesn’t understand history or economics or common sense.

you assume just because someone is a real estate agent they know what’s what. but maybe watts doesn’t know what’s what. real estate agent isn’t exactly a career with big barriers to entry. anyone can do it. a child could do it if there weren’t age requirements. so could a pet, but i think you have to be human. have you people never been to open houses? have you never talked to these folks? have you never seen those blank expressions? have you never tapped on their head with your knuckle and heard that hollow sound?

so give gary a break, OKAY??

http://biz.yahoo.com/ap/061003.....html?.v=10

They do not promote home sales if that low interest rate environment takes place during a recession. Most people that I know of do not want to buy a house if they fear losing their own jobs.

Statistic #2: Oil is dropping, from $78 a barrel to under 60 this week. Home prices are dropping (a little). Are those two signs of inflation? NO. So why would the Fed raise rates?

True. This is a sign of deflation, instead. However, the fact that home prices are ‘flat’ is still a MAJOR problem for those who are trying to make ends meet with HELOCs.

Statistic #3: This board and its discontents ALL base their bubble burst scenario on the massive re-setting of ARMs leading to massive foreclosure. but that scenario is based on RISING RATES, which we have just established will not be happening. That means people WILL be able to refinance when their ARMS set. Prices have only dropped a little, people still have equity, therefore: PEOPLE WILL BE ABLE TO RE-FINANCE.

On the contrary, most people have no equity at all (100% down, 125% refinancing, HELOCs, etc.) You also assume that the banks are still willing to refinance loans that are underwater (i.e. asset is worth less than the loan amount). And you also assume that ‘most’ people can afford to pay the refi penalities as well. If they couldn’t afford a more conventional loan at the time, then how are they going to pay the refi penalties and bring any additional money to the table when they are underwater on the loan(s)?

The main thing the people ont this blog forget is the most fundamental one of all: people need a place to live. they can rent or they can own or they can live under an overpass. (or with mommy.) With all you bubbleistas having convinced everyone that prices will drop, there are more and more people waiting to buy a house for a year or two instead of jumping in today. and what does that mean? more demand for rents — thus RENTS WILL BE RISING which will convince more people to buy. And since most people don’t even like to rent, the majority will also be looking to buy. All these people will be buying! And since no one will be selling now because they think they can get more for their house by waiting, the SUPPLY WILL BE TIGHT.

I can not see how that can be the case when all apartments have vacancies and multitudes of novice real estate investors are trying to become rental landlords at the same time.

i am a homeowner and have just about paid off my 30 year fixed.

Good for you! Most people are not nearly as conservative as you are with their finances.

Good one.

Basically, Austrian economics measures inflation by the amount of money supply (using tools like M2 and more predominantly M3). They tend to take a more holistic and predictive approach to inflation, rather than measuring price increases. As we all know, prices of some goods go up, some go down. Weighting them becomes a fools game as the FED has found, so money supply is much easier to measure and more accurate for long-term inflation forecasts since it can be a while before increased money supply works its way into prices, and by that time the horse is already out of the barn and inflation is already there. CPI measurements is like driving looking out the rear-view mirror. Austrian Economics looks out the windshield. I will admit, however that there is no one *right* way to measure inflation, I just find that monetary measures are more precise and predictable.

I wasn’t supposing that 22 y.o.’s should or even could buy a home. But, if their income is 60K, they are near the median and if prices don’t fall, there would be no way they could ever buy. We have a hard time attracting people to work for us in entry-level accounting positions for 70K per year in OC, and noone, and I mean noone relocates from out of state unless they make over 180K (we have had some out of state directors and VPs relocate in the past year, but even they rent) I know 2 examples where both of them say there is too much risk in the market and are waiting for market corrections of 30-40% or 4 or 5 years. (remember, I ,like Schiller, agree that there might be something permanently broken in people’s psyche about housing in the US, and I personally can’t see much beyond a 30% decline. ) Which, incidentally would only bring affordability in places like SoCal into the 30% range from the current 6% variety. Still not historical norms. The last 10 years were an abberation caused by Easy Al’s credit bubble expansion. It all started in 1995 with the reduction of reserve requirements, effectively quadrupling the money supply without increasing reserves. In fact, banks are in a much more precarious position today than the S&L’s were in the late 80’s. And, this is why I believe we will still see a “credit event” that will cause global liquidity to evaporate quite abruptly.

However, I know quite a few 30-35 y.o.’s each making more than 150K in Orange County (and one or 2 much more than that) that are unwilling to afford a home through suicide mortgages and/or major life concessions such as fewer/no children. Having a bigger house with no children to fill it with seems a bit egotistical. However, it is a fact that a decent 4 bedroom home in OC will run in the 900K-1.2M range for neighborhoods that will not be overrun by gangs in the next 10 years. Fact is, age has nothing to do with being able to afford a home… income does. It wouldn’t matter if I was 17 and making 1.5M. I could still buy a home, but that’s not the median income, either, is it?

I rarely read Krugman, in college was required to read one of his books, peddling prosperity which I found quite enlightening, but yes, most economists are not happy-go-lucky people. I think that’s why they call it the dismal science.

Yes, we all know that rates are historically low, which supports the argument of price declines even more. If we have record low affordability with some of the lowest rates in history, what will happen when rates return to long-term averages? Or, do we all suppose that they will stay this low forever? Will rates go to 9 or 10%? I have no idea. They could even stay at 6% for 10 or 50 years, which would mean some serious implications elsewhere in our economy. We need good returns to stimulate savings. Our long-term success depends on saving, not spending.

Yes, we have overbuilding, and rents are a function of rental stock and rental demand. If jobs dry up and rental stock increases (from sellers renting out instead of taking a loss), rental prices will fall. There is no guarantee that rental prices will increase in the future.

And, yes, you did make value statements. What about that 22 y.o. sitting in his “dingy apartment”? Is he waiting for prices to come to 1964 prices? No, he or she just wants to buy a home. You laughing at his predicament does not change that if this guy can never own a home, prices cannot continue up. That’s the invisible hand of economics at work.

For the record, I got a much better than 25% return on my investments over the past 2 years. In fact, I returned over 55%! Do I wish I had a house while doing that? Yeah, but doesn’t everyone?

P.S. Yes, losing the Crocodile hunter was a tragedy.

Here is one that has yet to be refuted by any RE booster.

http://www.piggington.com/bubble

Go to the 2nd tinyurl in my first post and read it there as well.

Now is a bad time to buy RE.

I may be a clown but i am NOT part of any real-estate-industrial-complex (though i do like the term!)

And by the way, I’ve read some of your posts. If there IS a nuanced discussion of this topic going on somewhere, you certainly don’t have what it takes to understand it.

I enjoy your blog. Very thought-provoking.

i understand the difference between short and long term rates and am well aware that mortgage rates usually move with the 10-year-note.

was there something in my post that made you think i blame the media for recessions? i’m not that type, and i don’t even wear a hat. (baseball cap once in a while though.) i think the home boom was driven by the introduction of exotic loan products on a widespread (too wide) basis and an excess of speculation. i even said in my post that i’m not an amateur speculator and don’t like ‘em! but even with the tepid “crackdown” on risky loans by the govt i think they are here to stay and have thus changed the pricing game on a permanent basis.

if you read Robert Shiller, you’d see that his most recent essays on the real estate market question whether prices will decline because he says people’s expectations may have been permanently altered. you can find it on the internet. you should read him since you’re citing him. as for krugman, i read him. he’s a boring ranter. the kind who’s wrong 99 out of 100 times and then the one time he’s right says, “See! I told you!”

also, just because i defended some things gary said doesn’t mean i’m him! again, if you read my whole post, you and i are not in complete disagreement.

i don’t know what Austrian Inflation is, i’ll admit that. sounds like something a birdwatcher would spot. but i’ll do some research on it. but you can’t tell me that fluctuations in gas prices and home costs don’t affect TRUE inflation. i understand a bit about the CPI and the crazy way it counts rent costs instead of home costs for housing etc., and thus a drop in both HAS TO effect inflation’s toll on the dollars you hold.

Of course ARMs will adjust higher — I didn’t say they wouldn’t! I said people will be able to re-finance. you’re talking about a recession and even a depression and you think the fed is going to be raising rates in the face of that? uh, i doubt it.

if rates were going to 9, 10 percent, people would have some serious problems re-fi’ing out of their ARMS but you have to know that rates are historically low still. you know that, right?

Finally, you have the gall to question my values, yet you think a fresch-scrubbed 22 year-old grad making 60 grand is “entitled” to own a house in SoCal. again, you should read someone’s post first before launching a personal attack. i said i’m against speculators, not renters. in fact, some of my best friends are renters. i have no doubt that many of your readers, like myself, are homeowners, but if you read your own blog you will see that MANY of your posters are bitter missed-the-boaters who jump on any realtor who posts here like a wolf on a limping housecat.

i like your blog, and if my post offended you i apologize. you are obviously well-schooled and we disagree about much (but not all). plus, now i am going to read up on the internet on Australian Inflation so you are even a teacher too! (Very sad about that Crocodile Hunter guy, wasn’t it?)

Sunset. You’re right. I have been on vacation for 2 weeks and I just got carried away with my first post back.

I just get so aggravated when facts are staring others in the face, and they trust morons like Watts on his fabrications… I guess that’s just the altruist in my, I’m still trying to show them the truth even when they don’t accept it. It is true that you can lead a horse to water, but you can’t make them drink.

BTW, I realized that Jon covered thin same thing in that first tinyurl that you posted! Darn, beat me to it.

Remember Pearls before Swine.

http://en.wikipedia.org/wiki/Pearls_Before_Swine

A nuanced discussion with college level economics concept is lost on these REIC clowns.

John

He did a story on the infamous Gary Watts.

My favorite comment was “Gary, you can’t mix whiskey and prozac.”

Here is the tinyurl.

http://tinyurl.com/obkrt

Oh yeah and for the delusional kingpin see Lansner’s post here.

http://tinyurl.com/ljeru

1. Real estate moves at the margins. It took less than 15% turnover to move prices up 100%, It can take less than 100% turnover to move prices down 30%.

Saynotochickenlittle…

No offense, but what you and Gary are talking about with respect to interest rates is wrong. The FED does not set mortgage rates, and as evidenced by the past 2 years, they plain out are DECOUPLED. Credit spreads are compressed and we have a flat yield curve. Only 2 things can happen to put this back inline… 1. lowering Fed rates… which I hope you know that this signals the FED believes we are about to hit at least a soft patch, maybe a recession, and potentially a depression (no doom and gloom, I just dont’ believe that there is enough information to determine what the future course of the economy is at this point), but it’s clear that the FED still believes that inflation is at the high level of their comfort zone. I would place the chance of lowering rates later this year at close to zero. I could be wrong, but that doesn’t mean that mortgage rates couldn’t go down, as we could in theory (only in theory, it has never happened, and I see no way for this to happen without major government insurance) have zero credit spread, which would put the bond market in risky territory and artificially propped up by some external force.

Next… you think there is a lot of bubble bursting talk? Really? I actually found that most people have no idea about it because it’s not important to them. I think the coverage could be much, much uglier than it currently is, and is still very tame in most publications. Do you think that recessions are fabricated by the media too? Might want to adjust your hat, there.

As for your friend… yes, there are still lucky ones getting good prices, but that is much less common, and one story does reverse what most others in the real estate industry are saying. I too have industry sources that say that prices are falling, and have specific concrete examples of houses bought in the last 2 years selling for the same price.

We do read real economists, not psuedo-salesmen who call themselves such. What about Paul Schiller and Paul Krugman? These are preeminent scholars and published economists. I guess they dont’ count because they don’t work in the Real Estate Industry? Seriously, if you went to a used car lot, would they tell you it’s a bad time to buy a car and that prices will be lower next month?

Oil and housing dropping mean nothing to CPI. Inflation, yes, but only indirectly. These are asset prices, not consumption prices. The difference is subtle, but important. I personally subscribe to the Austrian view of inflation, and in that case, we have had runaway inflation the past 4 years. Time to pay the piper since CPI and Austrian must equal in the longer term.

Rising rates are real because we’re talking about ARMs, you dolt. ARMS had much lower rates historically. Look at 2003 and 2004 when 3/1 arms had 3.5% rates (and that’s not even considering the Option ARMs or I/O loans). Now these same are at 6%. Even with them coming down off of 7%, 3.5% to 6% is a big jump. If someone qualified for their payment at 3.5%, payment shock could ensue. Most policy makers are hoping for an orderly transition, with incomes rising to meet the new demand. However, we might still have a recession since all of that discretionary spending could quickly evaporate. (and more importantly, this could mean a weaker dollar due to international wage arbitrage, and decreased competitiveness globally due to rising wages. If that happens will we see another Smoot-hawley act? That would be pushing us closer to depression!) Either way, we are not going to 3.5% ARMs any time soon.

BTW, statisics that Southern California is a great place to live is not a statistic… that’s a value statement. However, I agree. It’s a great place to live. But, it was also a great place to live 10 years ago. Truth is, migration statistics have borne your assumption out as plain false. Southern california is only recieving international immigration, not from intra-country sources. There has been a clear path of out-migration to other states of California residents, and only in-migration from international locales. The bigggest? You guessed it, our friends to the south. Explain to me, if they were so rich to afford living here, why would they be leaving Mexico?

Lastly, are rents rising? It’s possible. That’s a good way for the alignment to come back. But, remember, rents cannot be financed and must be paid out of current earnings, so that would be a trigger of increased inflation (which causes the FED to raise rates negating your previous point) Remember, stable low inflation is seen as one of their primary mechanisms to create long-term stability and growth. If rents to up, so will FED rates be going up. If they go up, our credit spreads are so compressed that there is nowhere for mortgage rates to go but up.

BTW, Many of our readers are not people who missed the boat. They are people who have owned homes (or still do). I do not believe that people are lesser because they do not own a home. Your social bias comes out plain and clear. Perhaps you need to reevaluate your values on what is really important in life? Hint, it’s not material posessions.

In the end, your statements are great for glossy advertisment handouts, but they do little to explain the dearth of affordability (which has never been this low). Tell that to a new college graduate making 60K!

I’m not entirely sure of the source of Watts 7.7% number. I understand that he is either looking at (1) the median YTD for 2006 compared to the median from 2005 or (2) the average monthly YOY increase (i.e., Jan. 06 compared to Jan. 05, Feb. 06 compared to Feb. 05, etc. and then averaged together). I haven’t done the math but these numbers appear to put you in the 7.7% ballpark.

Of course, saying today that home prices rose 7.7% compared to 05 is not useful or accurate in any real sense that applies to today’s market. His Oct. 05 “forecast” for 06 got a lot of mileage out of the price increases from Jan 05-Aug. 05 that were already booked more than a year ago.

Watts’ “forecasts” have always had a large “driving by the rear-view mirror” component, which is combined with the understanding that the people who rely on his forecasts are bad at math.

You know the funny thing is that demand is now picking up a little. While I disagree with Gary about 15% appreciation I do believe appreciation will be about 4-5%, enough for prices indexed for inflation to stay flat. This is not a bad thing as incomes catch up a little.

It’s very likely the Feds will start lowering interest rates next year. Agreed on that one

Also, the statistic on ARMs is greatly exaggerated. As you correctly stated most homeowners will be able to refinance with little impact. Incomes and job growth are strong and they will be able to hang on just fine. The few that will default will not be sufficient to affect the market in any significant way, assuming this is just wishful thinking.