San Diego Housing Bubble News and Analysis

"demand is accumulating "

not as fast as inventory

ciao for now...

Voz

has there ever been a time of no demand? is the suggestion that during the run up, when everyone and their gardner was buying, there was no demand???

heck, i demand a lamborghini, but that doesn't mean i'll buy one...

A. It won't be fast.. and (BTW there never has been a quick bounce back)
B. It won't be for a while.

When the absolute bottom is found (I think 2012), it will most likely remain stagnant for at least five years.

The demand building on the sidelines is nothing compared to the demand that we experienced at the height of the exotic loans and the most lax point in underwriting. Currently home prices are falling, we are getting into some nasty resets in Prime Option Arms, so the default / foreclosure story is still intact. The return to easy loans is way way way down the line and I doubt we see that type of phenomena again at least in Mortgage Backed Securities. Are there qualified and.....Confident.....buyers that will jump in this Spring, yes. There is just not that many of them. Also a recent poll just came out that most Americans now believe we are in a recession. People don't buy into shaky RE markets when they have the thought of recession in the back of their head (we did not have that in the Spring of 07). In order to move the glut of inventory that now permeates most of the California market there will have to be a bid that is perceived to be under market value. That is how you return to equilibrium.

BobS
There will not be a "bounce back". History shows that housing and building cycles are a lot longer than economic cycles. The latter have averaged 3 - 6 years peak-to-peak (or trough-to-trough) since WWII. Housing cycles more like 10 - 12 years. Public sentiment propels the housing cycle, and it takes longer to turn around, and is not always correlated with the state of the economy.
Consider: CA housing prices had their big run-ups toward the end of the 1970's, then the 1980's, and then the 1990's, with the last one lasting longer and being more powerful than normal.
If you believe that the strength of this downswing is rooted in and dependent upon the excesses of the previous upswing, then this decline will be all the more powerful. Accordingly, crowd behavior should lean heavily against real estate investing once we bottom out a long time from now.

I think the only way there could be a "bounce back" would be if some new financing scheme emerges. If we go back to 20% down as the only way to buy a house it will take a very long time before the market bounces back. There aren't that many people who have accumulated 20% down payment and are willing to go out and spend it right now. After the carnage, when there is a lot more blood in the street, many people will be even more reluctant to part with their dough.

However...builders, realtors, lenders, etc., may go to the govt. and argue for some new special "scheme" to "jump start" the housing market...so there may be some new program to get people into housing, and that could jump start the cycle.

I think the only way there could be a "bounce back" would be if some new financing scheme emerges. If we go back to 20% down as the only way to buy a house it will take a very long time before the market bounces back. There aren't that many people who have accumulated 20% down payment and are willing to go out and spend it right now. After the carnage, when there is a lot more blood in the street, many people will be even more reluctant to part with their dough.

However...builders, realtors, lenders, etc., may go to the govt. and argue for some new special "scheme" to "jump start" the housing market...so there may be some new program to get people into housing, and that could jump start the cycle.

I got a new funding scheme that I can propose.

Offering 40,50,60 year fixed rate mortgages.

That way 40,50,60, someone will have to pay all the way up tho their golden years and beyond.  You might wonder how someone would pay for a 60 year mortgage if they take one out when your 30years old? Ah, simple. These new mortgages would  also be tide into a life insurance policy where the mortgagee pays the insurance premium as part of the mortgage, and the beneficiary of the policy is the creditor. 

So as part of mortgage, you not only have to to pay PMI if you put less than 20%, you also pay LIFE insurance premium to cover if you croak over before you finish paying all 60 years. Of course, the life insurance premium would be steep, just like Universal Life or Whole Life. But, don't worry, it would also be tax deductible. 

Creative isn't it? I should have worked for wall street.

what we have to watch for is any mention of "land banks" which is one of the many logically flawed Keynesian economic policies - the idea is to establish a bank that will provide cut-rate loans on real estate regardless of LTV and also buy real estate and hold it in their portfolio - in essence, the land bank becomes the lender and buyer of last resort in an attempt to circumvent the price discovery process in an open and free market

this idea is already being floated as part of the bailouts - the idea is that local governments (ie, city, county, state) would establish and grant municipal bonds to subsidize the FB's in their region - the only problem is that very few local govts have the finances to do this and many of them have credit rating problems that would make the issuance of bonds problematic

interesting times ...

~

has anyone noticed that all the money being raised by the failing financial institutions is being done in the form of preferred stock?

homework assignment: in a bankruptcy, what is the priority order for paying off liabilities and where does the common shareholder fall?

Actually, I think that when the market does finally hit bottom and the inventory drops to below 6 months worth of sales that the "bounce back may gather momentum very quickly. There are a lot of people who got a taste of not working for a living and who are sitting on the sidelines trying to work the REO flips and such right now. By the time this drags on, I think these people will jump back in at the first opportunity.

I've had conversations this week with a couple brokers and "third party" loan originators. Thankfully none of them are clients of mine. These guys know there is no profitable play for their clients right now but they don't care. It's all about the commissions and the churn. They are chomping at the bit looking for a dream to sell, and according to them they have a lot of buyers who want to dream that dream again.

I don't think we should ignore the sentiments of these bulls. The only thing that would slow them down is the availability of financing. If the financing is at all reasonable, I think there might be another price spike. The only question in my mind is whether it will lead to the gross distortions we had this time, and that will depend on the greed of the lenders and the laziness of the government.

I doubt you could lose money betting against either.

How fast can it be when most will be broke or have bad credit or both.. screwed up credit will take 7 years right? So my guess is 7 years.

Actually, I think that when the market does finally hit bottom and the inventory drops to below 6 months worth of sales that the "bounce back may gather momentum very quickly. There are a lot of people who got a taste of not working for a living and who are sitting on the sidelines trying to work the REO flips and such right now. By the time this drags on, I think these people will jump back in at the first opportunity.

Bugs, i know exactly what you mean.  My take on this is how long it takes for us to reach the bottom. 

Those flippers you're talking about may not have any wherewithal left when all is said and done.  I know a couple professional flippers.  They have to keep their crew paid, fed and nourished. 

demand cant consist solely of flippers... who's going to buy from them? they can't just sell to each other....

Remember how slowly the top, then the turnaround came ?
Think of this market as a large ship. It takes a long time to turn. In San Diego the initial decline in sales started in 2004, prices continued their climb through 2005, though more modestly than previous, flattening and signs of distress on the margins in 2006, full-fledged decline in 2007. SO it took nearly 3 years from slowing sales to what I think is the steepest part of the decline.
Once sales start to increase, I think it will take about 2-3 years to show up in terms of solid uptick in prices.But first we have to go through more downside and some flattening. I wouldn;t expect a rapid sustained turnaround to be very quick..

However, I DO expect people to claim in Spring 2008 that we have started turning around, but they will simply be faked out by typical seasonal (relative) strength.

However, I DO expect people to claim in Spring 2008 that we have started turning around, but they will simply be faked out by typical seasonal (relative) strength.

I'm expecting spring 2008 to be a big bust.  That will cement the notion that real estate is in for a protracted downturn.  Even the die-hard flippers will give up by Fall 2008.  

We have 1 more year to find out.       

Possible scenario,
It is possible that there will be some really good deals next year. I believe more strongly that sometime in 2009 this will be true. It won't be the kind of stuff most people want and it will take time to sell or go at auctions. Investors will be a good portion of the buyers involved and they will be waiting for, or forcing the market to deliver homes that "Pencil out".

Other housing deals will continue looking pretty ho hum ,especially relative to job prospects and interest rates,and other domestic finance issues, so a "bounce" back will be precluded from occurring, even though some will be "getting ahead with RE again".Some people will be buying and only going modestly under water from their entry point. No big deal for most of them.

Find a new way for Americans to get into debt and you can just about write your own ticket. The last thing that banks and credit card companies really want is for people to be truly financially independent. Just think where they would be if everyone paid cash for things?

My proposal is as follows. There is no need of money down on a housing loan, just that the buyer will use one kidney and a portion of his liver in leiu of collateral. Since we've seen that the price of a house can fall, the bank or investors need to make up their losses somehow and they will do that by selling a portion of the borrower's liver or one whole kidney. The more cosigners of the loan, the more organs can be harvested. This will allow healthy people of modest means to live in McMansions or own beachfront property.

This is all to engineer an "ownership society." : D

The bubble was due to:

1. Lax lending practices
2. Above normal appreciation
3. Strong economy
4. Low unemployment levels
5. Low inventories

Is it realistic to expect that the same set of circumstances will return when we hit the bottom?

In my opinion the scenario is likely to be:

1. No easy money to be had, 20% down is the norm
2. Appreciation is flat
3. Economy is just digging itself out of a recession
4. Unemployment levels are shaky, construction, real estate, and mortgage workers are just starting to find jobs again
5. Average inventories (at best)

These are not the right set of circumstances for any kind of bounce at all. The market will follow need, rather than greed, and prices will be in line to incomes, long before we see any kind of bubble again.

At this point it's all cart-before-the-horse anyway. We'll have at least a couple years for the downswing to play out before anything stabilizes, let alone sets up for the next upswing.

I don't think there will be a bounce back, because I don't think anyone, investors or sideline sitters, will look at Real Estate as the cash opportunity it was.

Not only that it will be years before prices start going up steadily.

I was thinking the same thing as Bugs...but of course in true Piggington style there are discussions well ahead of the curve here.

As for a bounce-back, I have to disagree with coop on this - I and many I know who have been investing in real estate for several decades are sitting by calmly, knives and forks in hand, waiting to feast on future opportunities in real estate.

I kind of agree with Counselor and Bugs on this. I believe there are two classifications of real estate investment, smart money and dumb money. Smart money real estate investment is thus subdivided into a few subclasses. These include people with wealth who are looking for appreciating vehicles who are not much concerned with cash flow and/or the hassles involved with dealing with alot of renters. So this may be a wealthy individual or family who purchases mid level or higher SFH during down cycles in real estate, then holds them for a few years or even longer for long term gains. Another subclass would include people who buy multiple rentals, who utilize leverage and who make money with cash flowing properties. Inside this class are more nimble types who study regional markets and move in and out of them well ahead of secular market crashes. These are the types who sold out of higher density rental properties in 03/04. Then the dumb money. The dumb money are people who got lucky. They flipped during the runup and enjoyed the benefits but like an addict, they purchase more property in 06 and are still to this day trying to flip. Yes some of them are still out there.

I think that there is quite a substantial amount of accumulated wealth on the sidelines waiting to buy. The classifications of what types of properties these individuals buy will indeed vary as will the timing. It is really hard for me to try to envision how it will play out because everyone has that threshold for when they will pull the trigger. I do not think that we will hit the bottom and bounce hard up. My thought process is that I don't see all the lions jumping in on the meat at once. I think there will be a more measured entry that will not occur when we hit bottom, it will occur before the bottom, maybe well before bottom and it will serve to reduce the slope of the decline. Then we will level off and start to ramp up. I see that happening over a period of about 2 years. I think it alot depends on the lending environment. If the market is dominated by the wealthy investors then I do not envision a steep slope back up. To me bubbles are not caused by the rich, they are caused when the masses that cannot afford the assets are allowed to purchase the assets. If the lending environment will not allow just anyone to enter, the appreciation rate will stay in measured rates.

Just my guess...

SD Realtor

In Australia after the last run up, they basically held flat for 10 years or more and then had another big run up. My thought is that the market will fall for another year and then just flat line for about 5 years. I know that I am saving and ready to act. I just wonder if the frenzy mentality could start again if the backlog of buyers keeps growing.. Granted lending standards would stand in the way of that, but I think lenders would do it all over again if they could. The people I know who want to buy are very, very hungry for a home. Thus I feel that the amount of ready and willing buyers is still at all time highs. Plus, I know people with tons of equity still looking for a deal on a second home.

Bah, another where's-the-bottom post. Who cares anymore. Bottom ain't coming for a long long time; you'll have plenty of warning when things start to pick up again.

I started out thinking this was just a real estate thing, and as time has gone on, realized there are big, deep systemic issues in the U.S. economy. This is way beyond real estate. There is a rather nasty credit crisis going on, banks are writing off billions in mortgage derivatives; this thing is the size of the S&L crisis, if not a good deal bigger. The last run up had none of the systemic changes (e.g. mortgage securitization) fueling it. SIV's are dead, haven't you heard?

You have friends hungry for a home? That hunger has a way of dissipating when price appreciation does not appear. Appetite for second homes tends to evaporate when potential buyers reckon on price depreciation.

It will take years for people to forget about wild price appreciation. Declines beget declines just as rises begat rises. Long after will come the bottom.

In Japan at the height of their real estate bubble they were actually doing 100-year mortgages. I don't think there was a life insurance component...the assumption was your kids would just take over payment on the mortgage.

"However, I DO expect people to claim in Spring 2008 that we have started turning around, but they will simply be faked out by typical seasonal (relative) strength."
___
I just don't think everyone is a savvy as the people on this site. Once they feel that the market is on the way up again, they will jump back in with both feet.This is not like the stock market rush of the late 90's. I never really heard people excited after that decline to jump back into stocks once the market turned. Real estate on the other hand seems to be different. Most people I talk to are ready to move, and they won't want to miss it again, even if it does not mean huge equity returns, but only an affordable place that they can call home. I also don't think we are that far from affordability.

How fast can it be when most
Submitted by anxvariety on December 12, 2007 - 9:26am.

How fast can it be when most will be broke or have bad credit or both.. screwed up credit will take 7 years right? So my guess is 7 years.

My thought is that there is going to be a one time "Forgiven" policy announced for people who had credit issues between 2005 and 2007. Thus, they will have one or two marks eliminated from their credit scores. Look, the govt. is going to do everything possible to make sure we start buying homes again, so any logic of what happened in the past is no longer relevant.

92024 - I agree with you that there will be some kind of debt forgiveness act (edit: although I don't support the idea and would vote against it if given the chance) - the thought of a 'mulligan' came to mind when I read your post - I was reminded of the movie Tin Cup where Kevin Costner teaches Rene Russo what a mulligan is

mulligan: In golf, a mulligan is a shot retaken, due to an errant shot. Like gimmes, mulligans are strictly prohibited in the official rules of the game, but are commonplace in social golf. Traditionally, mulligans are allowed only on the tee shot (usually one per round) and are not just taken at any time of the golfer's choosing. More permissive mulligans are often identified by the terms floating mulligan or walking shapiro, can be used on any errant shot except on the putting green. Golf tournaments held for charity may even sell mulligans to collect more money for the charity.
http://en.wikipedia.org/wiki/Mulligan

Olly olly oxen free: a phrase used in children's games, which is generally used to indicate that people who are hiding (in a game of hide and seek, for example) can safely come out into the open.
http://en.wikipedia.org/wiki/Olly_olly_o...

92024 -

I also don't think we are that far from affordability.
I'm curious. In what areas ? By what metric ?

You guys who are predicting a bounce back are jumping the gun.

Housing in So Cal are far from affordable. Atlanta, and Orlando and Minneapolis, all cities that have median income comparable to SD, and much lower prices, are experiencing foreclosures aplenty. Our housing prices are still far their levels.

We are so used and desensitized to our prices that we are too quick to see a deal.