My apologies to regular readers. A couple of good posts are coming down the pike that take more than a week to prepare. In the meantime, we’ll take a brief look at the changing view of mortgage lending and the housing bubble. First, to preface, this is something which many know, but some have forgotten. Just one year ago, the housing bubble was believed to be a fabrication, dreamed up by some insane bloggers who got a hold of their daddy’s credit card and were able to buy a domain and start a wordpress blog… or more insidious, a free blogger on Google’s blogspot domain.
With some otherworldly charts that only quoted the past 10 years, they all showed how housing was supposedly “overpriced”, and that the trend was not just unsustainable, but unstable at best, and could lead to disastrous consequences. These views were largely ridiculed and scoffed at by some of the best known commentators on the housing market. In fact, in some ways, it was surprising that people like David Lereah or Gary Watts were even answering questions about the “Housing Bubble”, for they assured us all it never existed, and its believe was surely caused by bad upbringing, or education to underachievers who could barely tie their shoes.
Consider that as a backdrop for an article written on the Mortgage News Daily by Matthew Graham.
People talk about the real estate boom that began around 2001 and ended about mid 2006. People and “experts” talk about the boom as if it’s something that’s happened before. “There have been up times and down times” they say. “This is just another boom.” Those “experts” are wrong. There has never been a period like this. We have just experienced the largest housing boom in history. Might there be another one that supersedes it in the future? Possibly, but I would argue that the current time period will serve as a sobering lesson for us in the future. I would argue, this is as big as it gets. And it’s not because I have the experience to have lived through previous ups and downs. It’s not because I have decades of experience tracking these issues (because I don’t). It’s not because I have the foresight to predict the future of the markets. It is due to a simple truth: this “boom” is so much more inflated than any previous booms that it will stand as an obvious outlier in historical home price data. That is to say, compared to other upturns and downturns, the current boom is a much much larger digression from the mean than we have ever seen.
That this view is now widely held is self-evident. Why, then, did it take so long for the belief to become widely accepted?
The simple answer, because it does. Consider the following quote from Malcolm Gladwell, the author of “Tipping Point”:
The word “Tipping Point”, for example, comes from the world of epidemiology. It’s the name given to that moment in an epidemic when a virus reaches critical mass. It’s the boiling point. It’s the moment on the graph when the line starts to shoot straight upwards.
It just took that long. Now everybody knows it except David Lereah, Lawrence Yun, and of course, Gary Watts. At some point, even they will need to concede. At that point, it’ll be time to look for the next one, maybe just not as big. Until then, there is a lot more pain. More write offs, more defaults, and more price declines. Commensurate with the boom, this bust will be the biggest ever seen. Some just haven’t recognized it yet.
“Just one year ago, the housing bubble was believed to be a fabrication…” What are you talking about?
It IS a fabrication. A bubble indicates a “pop!”. There has been no pop. What we have seen is a slow, steady, cyclical, predictable downward trend. How is this a bubble?
It is irresponsible of you to push this idea so hard. It is currently fashionable to talk about the sky falling.
Right now, people from China and the UK are frequenting my site to look at listings more than people in the USA because they know that it is time to buy in a down market.
What are you trying to tell your readers? That there is no hope and so sell all their Real Estate now?
All that is going to do is further fuel the fire of speculative selling, further depressing prices in the short run. Those foreign investors will be raking up the dollars that your readers threw on the floor.
REAL ESTATE IS A LONG TERM INVESTMENT.
If you want to buy while the getting is good, you can find FREE foreclosure/NOD listing at my link above, and you can find traditionally listed properties, too.
Also, I am going to start my own blog once my site redesign is done. It will be telling people the exact opposite of what you are spouting. I welcome your comments there, when it is up and running.
Why is it irresponsible to tell the truth? We have at least 3 more down years before we even bottom out, much less start to come back up the slope.
Just as a matter of reference, it took more than 10 years to reach parity in Los Angeles from the prior boom-bust from 1990 to 1996. That boom was 8 years, compared with our 10 year boom. This one was off the charts.
What’s wrong with selling your real estate before it gets even worse? It’s going to get worse. Much worse. We’re in the 2nd or 3rd inning of this bust.
Don’t believe me? Well, then, just hold on to your real estate. I can find plenty of equivalents 25 to 30% off in a few years. No skin off my back.
Chuck Ponzi
Chuck,
You got to figure the realtor trolls will have a lot of time on their hands. So expect lots more of this.
Hopefully they will be busy begging for food soon and it will keep them off the public library computers.
Freaking salespeople. Is there anything worth less?
Dear Chuck,
I understand you are upset but keep in mind that everyone sells something to someone some time including you. The fact that you voice your opinion in these blogs is a form of selling. If you really want to legitimize your anger and frustration take it out on all of our current political figures, god only knows you have so many to choose from.
Infact, Goldman Sachs has put out an official report STATING that all analysis points to a 35-40% fall. My personal belief is that the fall will be more like 50% because markets have always overcorrected in the past and this time is no different.
I live in a “trendy”part of Los Angeles and I’m seeing MLS listings on the market upward of six months despite 200k price reductions. I see homes taken off the market and then put back on the market a month later, only to sit there. NODs and foreclosures are popping up more frequently even in the upper income neighborhoods. Inventories in LA are increasing every day, in spite of slashed prices. At least in my area, it feels, smells, and looks like a bubble bursting.
As someone in real estate over 30 years and the last decade in lending, I can assure you it was a bubble. I believe, however, that it was more accurate to describe it as a debt bubble, which popped with a mighty fury. The streets’ insatiable appetite for mortgages created the easy qualifying that allowed people to take on unsustainable debt. The debt bubble created the means for the gold rush of this century, into real estate. I’ve been through housing corrections before, and unlike commodities, equities, metals or even raw land, homes are much stickier on the way down. The huge inventory of new homes may accelerate it a bit, as they will clear inventory or the bank will. I expect to see mini rallies on the way down, with hopeful NAR proclamations, to be followed by more drops as the new reality in lending shrinks the available pool of home buyers. The near lack of stated loans will hinder the first time buyer until prices drop to where they really can qualify for a 30 year amortized fixed loan.
There are a few things I am certain about and that is that the media and speculative rumors do not help bring back the housing market to it’s psedo
state that it was in. We all new the prices were going to adjust downward as they were so ridiculously inflated. I do agree that the smart investors and people who have a need to buy will take advantage of the fact that there are less buyers on the market at this time, and in turn allows for better negotiating with sellers. It’s not the end of the world folks just hang in there this is all normal and to be expected! Don’t forget we are at war!
You trashed the credibility of your comment by throwing up a link to your website where you are trying to SELL real estate.
If your sky is not falling, then why are you trying to convince us that CHINA and the UK know more about capitalism then the U.S.A. Maybe foreigners are “scanning” your website in bigger numbers because the dollar has tanked and not because “buying in a down market” is a new concept for the American capitalist.
If your sky is not falling, then you would not be sitting at your computer at two in the morning throwing up comments about what a great time it is to buy and then plugging your website at the end of any article that suggests your industry is taking a dive.
Your confidence only thinly veils the panic.
Oh and I looked at your site. The homes are overpriced. I think I’ll keep my money. I don’t feel the need to bail out the chumps who picked up screwy loans or the zealots who chased the price up the tree and now want a big government ladder. I say we throw up a rope, let em hang and get the prices back to reality.
It is interesting that you quote Malcolm Gladwell and his “Tipping Point” book, which is more of a book about marketing than a book about any scientific observation. In this case the quote you mention relates to epidemiology; the underlying phenomena to which it refers is to fatal viral diseases and population sizes. If a virus is fatal, then it wouldn’t make evolutionary sense for it to continue, would it? Theoretically, it would die out because it would kill all potential hosts. However, in reality that is not what happens.
Given a number of factors, such as initial population size, reproduction rates, and other constraints like personal behavior, fatal viral diseases will affect populations differently. Large populations, like in Europe and in Asia in the 1500s, are able to withstand fatal diseases like smallpox. Human population during the 1500s in North and South America was smaller, and smallpox had a much more devastating effect; the smaller, more dispersed native populations were less able to recover from the disease than European populations.
In any case, viral epidemiology bears no relationship to economics any more than Darwinian evolutionary thought applies to sociology (the old “Social Darwinism” bugaboo).
You are right about one thing, though. Real estate looks spooky in southern California. The average engineer in San Diego makes about $65,000 a year, while the average engineer in Peoria makes about $56,000 a year. The engineer in San Diego will have to pay about 10 times their annual salary to buy the same house that the engineer in Peoria can buy for about 4 times their annual salary. Eventually even the most stupid engineer from the worst engineering school in the world will finally figure out that something isn’t right with numbers like those. No fancy epidemiological formula or evolutionary theory needs to be transferred from biology to figure this one out. It’s arithmetic, not calculus.
Also, I don’t think this financial tragedy sneaked up on anyone except the end consumer and, of course, the stockholders, who traditionally are the last to know and the most affected. Perhaps these people should have paid less attention to Paris Hilton’s latest problems and more attention to their own pocketbooks.
Rob,
I disagree. If you see Gladwell’s book solely about marketing, then you missed the point. It’s about the propagation of ideas. Because he draws a parallel from one school of thought to another, doesn’t mean that all characteristics of the two are expected to be identical.
The reason diseases are not extinction events is because of the genetic variability creates varied susceptibility. It interacts differently with every person, just like a belief system. There are some who will always rent or buy based on percieved risk/reward. Beliefs about guaranteed investments tend to spread like diseases in that sense. I recommend a read through of “Extraordinary Popular Delusions and the Madness of Crowds” by Charles McKay as a good reference to that.
I do, however agree to your point about social darwinism, but frankly, I’m not a sociologist.
There will be many who will want to rewrite their own personal history, but those who believed there was a bubble in 2004, 2005, and 2006 were laughed at, and sometimes angered other people. The fact remains, very, very few people believed there was a housing bubble no matter what you think lots of people knew.
Chuck Ponzi
Wow! Thanks of all the feedback. I can really feel the warm, loving glare. I bet my past comments have received the same type of welcome. I will be sure to check on them here in the future. I have tried to address everyone here, but it is a lot of work to fight off a whole room!
Chuck Ponzi: Is it a bubble or not? If it is not a bubble, then it is irresponsible to fuel the speculative selling fire by calling it so. I wouldn’t consider it a bubble because of the slow speed of the pricing decline and because of the predictability of the decline.
LAEF2: “Trolls”?! What ever happened to calling those who disagree with you “Nazis”? THAT is truly the best way to end a posting conversation. If all you want to do is exchange ideas with a bunch of like minded hippies, move to San Francisco and get off the net. This is supposed to be an open forum. If not, have the moderator block my URL.
Brett: I do agree that the effects of the market correction are most pronounced in the mid range housing areas. The homes that were priced from $500,000 on up to at least $1.5 mil at the height of the market tend to be the most distressed, the biggest targets of past speculation, and also the target of some of the most drastic price cuts.
Paul Hiller: You said it “was” a bubble. Does that mean it is over? If it is truly a lending bubble, then The people who bought the loans from our US banks took the brunt of it, like Germany (who is taking a big hit in the subprime mess).
Is it over or not? Everyone here talks like they have a crystal ball. They are all talking about short term pricing and therefore timing the market and speculation.
D. H. Chamberlain: So my word means less because I interact with property professionally? Would you say the same of Alan Greenspan’s comments about the economy because he makes a living at it? That is B.S. If you want to have a conversation based on the merits of the facts, no problem. If you all want to resort to name calling, just call me Hitler and end this exchange! Just for you, I will try to label all of my posts with the following: ***I sell Real Estate for a living! Contact me at my web site for more shameless self promotion!***. Awesome. No better way to advertise that!
Rob W: I’m not so sure you were talking to me (maybe one of seven that was not). If so, please spell it out more plainly.
What will happen to this blog if and when home pricing does start turning up again? Will you keep the same URL?
Whew, this is a marathon quote…
Since you guys are having so much fun with me, I’ll give you more to chew on… Here is my first badly edited article! Give me your worst…
Mr Gentile.
It is a bubble.
What responsibility do I have to a speculative bubble? It did nothing for me, so why would I do something for it? It’s not a person, it’s an irrational belief. Why propagate an irrational belief that’s false. It hurts more to keep it going that it does to kill it now. And, frankly, if you think that I have even the slightest sway from my blog, you’re sadly mistaken. There are a select group of people who read this on a regular basis. It is not mainstream media, because the average person cannot keep pace.
I always said all along that when people woke up to the reality of a bubble, it’d be like a fire in a crowded theater. That’s because that’s the way it always has been at the end of a speculative frenzy. If the precious metals frenzy takes off, it’ll end the same way.
As they say, don’t shoot the messenger, I didn’t make the message, I’m just delivering it.
Its never worth arguing with a troll.
For what it is worth we consider this a bubble; because loans exceeded traditional lending standards causing prices to overshoot.
Additionally other metrics such as price to rent are way out of whack.
Also price to income is way out of whack.
From an investment standpoint it makes real estate highly speculative at this point.
You can quible about the pop. We talked about the timeline a long while ago. The semantics of “bubble” vs over valued and bust are small. In my opinion the horizon for real estate is on the order of 15 yrs. In that perspective a few percent drop for a few years (06-07-08-09) is a pop.
Hence, we looked at incomes and based our estimates on what we believe the price should be. Given the potential drops in SoCal prices could be as high as 50% or perhaps 30% after inflation.
Given typical loans you would be under water for many years.
That would be a bad long term investment compared to renting at this point.
Your own link is to find REO. That should tell you that prices got very fundamentally out of whack.
Anyhow, we are all adrift in forces larger than ourselves. The government can change tax structures, create massive inflation exc… that could bail out all the current FB.
Some of us that work for a living hate that because the small amount we are able to save is quickly devalued. We are forced into putting our money in high risk investments such as stocks or commodities.
As for your being a realtor(r): I consider your MLS hoarding a silly artifact and your “profession” unnecessary.
The internet will eventually rip all your income away.
Predictability of the decline? You ask Gary Watts about that? Is that a selling point when you take people to get property?
Yeah. I’m sure you spent the last couple of years (05-06-07) advising clients the value would stagnate or drop.
I think Alan Greenspan (who is not selling me anything but his latest book) would agree with me that your words “…buy while the getting is good” mean less because you interact (run a web site selling) property professionally.