Southern California Real Estate Bubble Crash Blog

With the mainstream media in a tizzy about whether housing has bottomed or not, the professional wishers and hopers are all too quick to tell us that everything will be fine, everything is ok.

Everything is not fine, everything will not be okay.

David Lereah, in fact was quoted:

Last year “was the year of contraction,” said David Lereah, the NAR’s chief economist. “When we get the figures for this spring, I expect to see a discernible improvement in both sales and prices.”

Uh… yeah. Call me in a few months and tell me how that’s working out for you.

The sad part (and the cause of so many dead cat bounces) is that the psychological environment changes enough for committed (and often overcommitted) interested parties to buy back in (Never Been A Better Time To Buy crowd). It is only when these parties become dissillusioned by repeated losses that the entire market capitulates and often sinks below fair value. In the heady times, leverage is power, in bad times, leverage is death.

Take for example, the latest “stock market crash” if you will. There were at least 4 distinct sucker rallys (aka Dead Cat Bounce) that occur from top to bottom.

Eerily similar, you will find that in a similar time frame (3 years), the Dow Jones had very similar action:

The year was 1929.

The fact that dead cat bounces occur is not in itself surprising. What is often surprising is how easily participants latch on to them. When so much has gone right for so many for so long, it is hard to imagine that it was all just hot air after all.

When Americans hear that their paper wealth is slipping away, the denial that grips otherwise educated, informed, and critical thinking homeowners is stunning.

Typical coping methods include:

“It’ll come back in the spring, I know it will” Even in the face of abysmal affordability, faltering economy, and a lending meltdown. Not surprisingly, many were in denial last year with the exact same phrases coming from many Real Estate Agents’ lips… and not surprisingly David Lereah’s as well.

“I’m not going to give it away!” Eliciting at least a few snickers from impartial observers. They may not be giving it away, but the bank may be forced to. This, of course, implies that there is some fundamental rationalization of the value of the home by the rents that it brings. When rents can barely cover 1/2 of the mortgage payment alone (not to even include taxes, insurance, or maintenance costs), while simultaneously having some of history’s lowest mortgage rates and in an environment of tightening lending standards, the future doesn’t look bright. You think affordability is bad now? Just wait a few more months and you’ll be surprised when statistics show that even fewer people in Southern California can afford a median priced home than the current 7% or less (depending on the county).

“It’s all the media’s fault.” Yes, it is. They bring you the truth. Good when it’s going up, bad when it’s going down. Still, think of all of the jobs we’ll create in the foreclosure reconveyance, reposession, and bank auditor areas. Bad for you, good for someone else. Maybe it’s just another form of creative destruction.

Will the housing market have a Dead Cat Bounce this spring?

The question is not so much, will it happen, but rather will it FEEL like it’s happening? Drawing inferences between very liquid markets such as the stock market are tepid at best. Because of the illiquidity of the housing market, any emotional lift caused by this psychological change is unlikely to bleed through to the price. Volume? Maybe. Price? Unlikely.

As we have seen, volume in Southern California is at its lowest since 1998. Which means we can still go even lower. And why couldn’t we? Have we resolved the underlying issue of affordability? Have we resolved the issue of the imbalance between rent and owning? Without these changes, the market is only being puffed up by more hot air. Reinflating the bubble with a small leak only serves to do one thing… place more pressure on the expanding hole… which causes even more deflation. The fact that housing markets are like the Titanic only means that it doesn’t immediately sink when it hits an iceberg, it just means there is time to get on a life raft. While 8 months ago was the best time to get on one, it’s still not too late. The last one took 7 years from top to bottom in Southern California, and another 3 years to return to previous price levels (13 in total adjusted for inflation). This is one DCB that sellers should not pass up.

Chuck Ponzi