News hit the fan yesterday that new home sales prices in the US had the largest downward movement in 35 years.
Without question, this is one of the most significant events in housing prices in a long time. Probably longer than many reading this have been alive. Therefore, the thing to remember is that this housing downturn is unlike any you have seen before. This is not your average run-of-the-mill 1990′s defense spending cuts downturn. This is the real deal.
In fact, Mark Zandi, Chief Economist at Moody’s.com is quoted in the article:
“It is going to be painful because there are a lot of price declines to come.”
Zandi said he is forecasting that prices of existing homes will drop by 3.7 percent in 2007, which would be the first decline for a full year since the Great Depression of the 1930s.
For those that don’t have an appreciation of history, the Great Depression is a period of strong price deflation.
For some time, we here at SCREBCB have been predicting that we will have a monetary deflation, and until recently were not convinced of a general price deflation, however, when well-known economists start throwing around comparisons to the Great Depression, we should probably at least listen.
OK, yes, there will always be kooky economists who constantly think the sky is falling. Many of them have something to sell you… a stock report, a speaking series, a book, or something else. It appears that Moodys has little to sell by reporting the potential problems we face.
But don’t worry, we have plenty of apologists to assure us that nothing is wrong, and that after a little downturn, we will be back on the top of the block.
According to Alan Greenspan:
But former Federal Reserve Chairman Alan Greenspan told a Washington audience Thursday that the economy will rebound after going through a “very weak patch.”“Most of the negatives in housing are probably behind, us but we still have a way to go” before hitting bottom, Greenspan said. “We have too much inventory still.”
At the same time, many realtors are assuring us that there is nothing to be concerned about. –Buy, buy buy, by heavens, buy… I need to make my house payment!
As reported in the Washington Post:
Realtors’ association officials blame the continuing slump on what Lawrence Yun, the group’s senior economist, called “confidence issues.” Yun said buyers are waiting until they think the market has hit bottom, particularly because high prices have made houses less affordable.”Psychological factors have people on the sidelines,” Yun said. “They are waiting to time the market.”Yun saw reason for optimism, and thinks an upturn is at hand. He said the September figures represent a “trough in the market,” because for the past two months, the inventory of unsold homes has fallen slightly.
Pay attention to Yun’s message: Don’t worry about affordability… Housing prices will continue to go up, up, and away into the stratosphere. We don’t need no stinkin’ fundamentals!
Remember the last time we heard this? I distinctly remember talking heads on TV in early 2000 gushing about certain tech companies that “no longer play(ed) by the old rules, fundamentals don’t matter.”
We shall see if fundamentals don’t matter.
At least for the Washington Post’s sake, they included an economist whose group has nothing to sell you:
Charles W. McMillion, an economist and president of District-based MBG Information Services, said he saw little sign that the decline was ending. “I don’t see stability when sales continue to decline sharply and price continued to decline sharply,” McMillion said. “It’s pretty hard to argue we’ve reached a sustainable level.”
and an academic economist:
Peter Morici, an economist at the University of Maryland, said reduced inventory of unsold houses may mean “frustrated buyers are removing their homes from the market.” Morici said that major price adjustments will be needed to bring the market back into balance.
“The speculative frenzy of recent years is causing a major adjustment, and the happy talk of Realtors is prolonging the process,” Morici said. “The absence of realistic analysis about the extent of overvaluation is characteristic in an industry that sees nothing but an upward progression for values, but houses like any other asset can be overpriced. . . . Things are likely to get worse before they get better.”
You decide who you should believe… somebody who is the mouthpiece of an organization that is trying sell you something and whose success depends on “happy talk”, or economists who have nothing to benefit from lower prices, and nothing to sell you.
We here at SCREBC have always chosen to try to focus on experts who have no reason to spin the information to readers, rather showing how each spin doctor quoted has a specific reason to believe what they say.
Next up? Anger and lashback from industry “economists”. I think “Guido the Killer Pimp” from the movie Risky Business said it best:
In a sluggish economy, never ever f@(% [edited] with another man’s livelihood. Now, if you’re smart, and I hope you are, you’re not gonna make me come back here.
Any idea where we are at in the curve with respect to the latest drop. Seems like the 05 gains are gone and we are retreating back into the 04 region.
I think it will go substantially futher. So we are going to be looking at the 02-03 range by the spring as normal inventory builds up and interest rates creep upwards.
With the ARM resets and increasing risk we should see a lot of refi activity that will accelerate the increase in intrest rates as well.
If we do revert to the mean by sometime in 08; what does that look like in terms of a percentage drop per year?
LAEF2
LAEF2,
I doubt we could revert to the mean by ’08. More likely ’09, and an overshoot until 2010 and 2011. But, that’s just my spitting into the wind estimate. Lots of things could change the loft and carry of my saliva.
Determining how much we’re going to drop is also a fool’s game. I would guess between 2 and 10% per year for the next 3 years.
As far as interest rates go… I’m not expecting to see “creep” so much as a “credit event”. This could mean 1 of 2 things: (or quite possibly both)
1. Lending requirements substantially increased within a matter of months or weeks
2. Interest rates jump 1.5 to 2.5% within a matter of weeks due to eroding loss reserve scares. Our credit spreads are too compressed to allow a FED pause too much longer. If it continues to pause, rates will go higher. If FED lowers (something I consider unlikely, but possible) then we will be cushioned.
In the end, financial manias are primarily psychological in nature. This one is no different. Everything depends on what people think is going to happen. Right now they think prices are going to go down, so they will.
How can Yun, a “senior economist” call this a trough using only three data points. You could statistically show the Great Depression never exited using three points from the stock market.
What. A. Tool.
3.7%?!?!?!?!?
Oh, the humanity.
My house has gone from $235,000 to somewhere north of $500,000 since 2002.
And I’m supposed to concerned about a 3.7% drop in 2007?
LOL
“My house has gone from $235,000 to somewhere north of $500,000 since 2002.”
Your house will be worth $195,000 — if you’re lucky –by 2008. Guaranteed.
(LOL)
Happyhomeowner:
Thanks for visiting.
You may not find it interesting, but I certainly find that it is. We have had 2 major events in the last 2 years that portend some future issues with our ability to manage debt.
First, our savings rate is negative for the first time since the great depression.
Second, we will have a nationwide year-over-year housing price drop for the first time since the great depression. Some areas will be much, much worse. It is more likely that the more expensive places will compress like an accordian than to disconnect in opposite directions. In fact, in a deflationary environment, the more leveraged areas will experience higher rates of deflation.
What’s interesting is that with all of the other recessions we’ve had in the last 75 years, not a single one has even broken a negative housing value. Just 6 months ago, it was declared impossible by the National Association of Realtors.
While there are plenty of megalomaniacs such as yourself that profess to have vast depths of wealth upon which to buy up every last ounce of property, the truth is that it isn’t until the water recedes that you find out who was swimming naked.
On the other hand… I have plenty of money in my 401K, and stashed away saving for my retirement… yet according to current estimates, less than 1/3 of all Americans will be able to retire without significantly impacting their quality of life. While you may stand by and laugh, there are many working to encourage people to have better financial management… and that includes not buying overpriced liabilities.
Hi neighbors!
The October $$$ transaction charts for the south bay LAX area have been posted.
“Your house will be worth $195,000 — if you’re lucky –by 2008. Guaranteed. “
That’s optimistically pessimistic =) Keep in mind that prices are determined by the market itself. At certain point a given price becomes a bargain and someone will steps in to buy, as long as the property is in good sellable condition.
In any case if such a huge drop will be catastrophic for the economy in general. Even if one is passionate about bursting bubbles, one should pray for such level of price drop to never happen.
Wrong and Wrong.
1) “At certain point a given price becomes a bargain and someone will steps in to buy, as long as the property is in good sellable condition.”
People will not buy no matter how low the price if they think the price will be even lower next year. Maybe you weren’t here to witness this in the early 90′s.
2) “In any case if such a huge drop will be catastrophic for the economy in general.”
Actually, no. Look at the post dot-com bubble stock market drop. The economy went through a cyclical recession after, but it was one of the mildest on record. A large drop would be catastrophic for people who got in the last year or two (or three) but not to most people, who will still be sitting on equity. Sure they’ll feel poorer, but they also felt poorer when their amazon stock dropped to 5.
I think the broker ad is like a sick joke.
I guess you can get your broker license on line.
Thats pretty much a statement about our lending system right there. That makes me want to invest in real estate/banks…. Not to mention the liar loans.
I also can not believe that homesellers would try to use strippers/whores to bring in buyers. What kind of bizzare sucker move is that? Your going to invest because you saw some boobs?
Oh vey
LAEF2
“People will not buy no matter how low the price if they think the price will be even lower next year. Maybe you weren’t here to witness this in the early 90′s”
Agree on point #1 response
“Actually, no. Look at the post dot-com bubble stock market drop. The economy went through a cyclical recession after, but it was one of the mildest on record. A large drop would be catastrophic for people who got in the last year or two (or three) but not to most people, who will still be sitting on equity. Sure they’ll feel poorer, but they also felt poorer when their amazon stock dropped to 5.”
You had me, then you lost me. I can’t agree on point #2 response. The only reason we avoided an all out recession in the post dot-com debacle was due to Fed intervention and manipulation, which led to our current housing bubble. I’m afraid we’ve run out of bubbles to prop up the economy, and the inevitable must happen. I’m afraid the housing bust is going to have some very dire affects on our overall economic outlook for years to come.
The best advice is to prepare well.
Tuesday, November 28, 2006
O.C. house prices fall for third month
The California Association of Realtors reported that the median price of a single-family home here was down 2.9 percent in October.
By JEFF COLLINS
The Orange County Register
The median price of an existing single-family house in Orange County fell from last year’s level for the third month in a row, the California Association of Realtors reported today.
The association reported that the midpoint of all O.C. house sales last month was $681,340, compared to $701,520 in October 2005.
That’s a decrease of 2.9 percent, and follows year-over-year price drops in August and September.
Sales continued their slide too, falling 21.4 percent from October 2005 levels, according to the association’s monthly index.
This was the county’s second home-price report for October. Earlier, DataQuick Information Systems reported that the median price of a single-family home was $665,000, or the same as it was in October 2005.
Read Hundreds of Home Loan Reviews and Complaints on Top Online Brokers!
Mortgage-Lender-Reviews.com