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Fearful
16 years ago

As always, a timely and
As always, a timely and comprehensive analysis. Thanks, Mr. Toscano.

November may be a slow month, but it sure does not look like that slowness manifested itself in price drops in earlier periods.

Mr. Drysdale
16 years ago
Reply to  Fearful

It will get much worse. Talk
It will get much worse. Talk to any bankers who have access to internal data and know, who are also willing to speak off the record.

Even if you know nothing about what’s going on behind the scenes at banks, the fact that public figures in the financial sector like Jim Cramer are telling people to walk away from their mortgage, and 60 Minutes airs an episode where borrowers state their willingness to walk away from homes they “CAN” afford to pay the mortgage on, but “WON’T” because they now feel like it’s throwing good money after bad, is a harbinger of catastrophic things to come.

Anonymous
Anonymous
16 years ago
Reply to  Mr. Drysdale

As prices continue to fall,
As prices continue to fall, an increasing number of owners will owe more than their houses can be sold for, and it is likely that an increasing number of these owners will walk away from their homes, and the banks will sell them for big losses. It seems likely that as this snowballs, many banks will be overwhelmed with the losses and will fail. If this occurs, investors will go into panic mode, and runs on banks might even occur. I never seem to see articles dealing with this sequence of events. It seems likely to me that this will occur.

drunkle
16 years ago
Reply to  Anonymous

i think this government will
i think this government will do whatever it takes to prevent that from happening. be it a direct tax-cash input, a freeze/moratorium of some sort, armed barricades of atm’s…

i dont see any circumstances in which the government would allow any of the large banks to outright fail. the threat of japanese style recession is probably more palatable than great depression style depression.

Mr. Drysdale
16 years ago
Reply to  Fearful

It will get much worse. Talk
It will get much worse. Talk to any bankers who have access to internal data and know, who are also willing to speak off the record.

Even if you know nothing about what’s going on behind the scenes at banks, the fact that public figures in the financial sector like Jim Cramer are telling people to walk away from their mortgage, and 60 Minutes airs an episode where borrowers state their willingness to walk away from homes they “CAN” afford to pay the mortgage on, but “WON’T” because they now feel like it’s throwing good money after bad, is a harbinger of catastrophic things to come.

jyurasek02
16 years ago
Reply to  Mr. Drysdale

Great data…I have a
Great data…I have a question that may have been answered in some previous thread…Are the dollars representing the low, mid, and high priced homes as of the peak prices or todays prices? I would assume that those categories are for the peak price, which means some of the mid priced could now actually be in the low prices tier, but still be tracked under the mid peak? Or do they move that home into the low tier once it has become a low tier home? I am sure there is an expanation.

JPJones
16 years ago
Reply to  jyurasek02

You should find your answer
You should find your answer here:

http://piggington.com/price_changes_in_low_mid_and_high_priced_homes

Here’s a quote from Rich a few posts down on that page:

“A home is put into a price tier based on its value as of Aug 2007. It won’t change categories no matter what its price changes are.”

Fearful
16 years ago
Reply to  JPJones

That quote by Rich was
That quote by Rich was because he was considering the August data set, not because that is when the tiers were established.

The breaking of the sales into three tiers is confusing.

Every month’s home price data set is composed of sales during that period. Each sale has a prior sale. Houses are put into one of the thirds based on the first sale of that sale pair.

For example, a house sold in November ’07 and first re-sold (initial sales are excluded) in June ’04 is put into one of the tiers based on which tier the ’04 sale places it in. If it was a bottom third house in ’04, it would be a bottom third house in ’07 even if it is a top third house in ’07.

I believe the dollar levels of the tiers are as of the particular month’s data set.

Bugs
16 years ago
Reply to  Fearful

The single tier is a lot
The single tier is a lot easier to follow but the three tier breakdown really does provide a better look at what’s happening. It’s especially useful when one of our trolls comes through citing an anecdote about one or two sales that don’t jibe with the averages.

Different market segments are moving at different paces.
———–

The slope on that curve is something else. I don’t recall any period where I’ve ever seen so much downward change all at once. The conventional wisdom was that prices would take longer to correct than they took to distort, but if this keeps we’re going to cover a lot of pricing territory in short order.

For the life of me I just can’t see this trend holding up. It’s got to moderate at some point and I would think that would happen sooner rather than later. When considering how long it’s going to take to get the rest of the foreclosures resulting from these ARMs in and out of the pipeline, the current price structure doesn’t have enough “gas” to bleed off to last the entire time.

Were this rate to hold up, an overcorrection that ran concurrent with the anticipated foreclosures would cut so deep we’d end up below the prices we started with in 1996.

Now I’m wondering if maybe it will bottom out quick and maybe just stay there for a while as the ARM reset schedule plays itself out. That would be a first.

Fearful
16 years ago
Reply to  Bugs

We are all sort of
We are all sort of dumbstruck, I suppose. I keep on staring at my graphs of the data, trying to glean meaning from them. A couple more things I noticed:

Especially after the inflation adjustment, I see that, as steep as the downslope now is, it is not as steep as the upslope was. The hump is still asymmetrical. This sort of jibes with common sense that prices are stickier on the way down than up.

The other point is that the tiers have inverted behavior versus the late 80’s / early 90’s bubble. In that one, the mid and upper tiers fell further than the bottom tier. Possibly that is because the lower tiers were more inflated by new loans, e.g. subprime.

When you look at the graph you see how vastly larger this bubble was than the prior. Man is it gonna be a rough ride.

NotCranky
16 years ago
Reply to  Fearful

The hump is still
The hump is still asymmetrical. This sort of jibes with common sense that prices are stickier on the way down than up.

Good eye/comments. I love the three tier system. They really are three different markets, from several perspectives. The three graphs get more symetrical in descending value order is interesting too.

blue_sky
16 years ago
Reply to  NotCranky

One other thing to think
One other thing to think about that might affect the speed of the downturn: real estate has never crashed since the internet became widespread. To me this is a VERY important difference because correct pricing is based on availability of accurate market information, and in this crash that information very easy to get. Previously you had to rely on your Realtor or the major news outlets.

Bugs
16 years ago
Reply to  blue_sky

That leads me back to a
That leads me back to a point I’ve been making on this board for a couple years. In the last 10 years we’ve made a lot of progress in making both the raw data and the analyses more readily available to anyone who chooses to look for it.

The housing markets will never operate off a completely rational basis but it could become more rational than it has been. Taken to its logical conclusion, the results of this trend would eventually curtail the degree to which these mood swings distort.

I’m looking to see how far this end of the cycle overcorrects. If it isn’t by much that would indicate to me that a lot more people are paying attention to the fundamentals and it might indicate to a generally more rational and stable market moving forward from there. If the cycle does grossly overcorrect I would interpret that as a sign that most people haven’t learned anything and have just been following the examples set by their friends and neighbors.

Anonymous
Anonymous
16 years ago
Reply to  Bugs

Bugs,
What makes you think

Bugs,

What makes you think the Internet will make people anymore rational on the way down than on the way up. Fear and greed are hardwired into the human psyche – not amount of information and analysis has ever or will ever change that. Information about the gross overvaluation of residential real estate and the open handed lending policies in force was easily had for the last 5 years. It didn’t seem to deter many people from buying. We have a debt-induced forced liquidation of assets underway – of course it will overshoot on the downside. When real estate becomes a truly hated asset and buying a house is universally viewed as a dumb idea, we will be at the bottom – that is the way bubbles end. I think we have a ways to go.

Bugs
16 years ago
Reply to  Anonymous

Brian,
I cannot disagree

Brian,

I cannot disagree with you about the folly of overestimating the general population’s capacity to be rational. I just couldn’t help but notice how much faster and more effectively the word spread about the changing market conditions this time as compared to last time.

I reckon I may just got have gotten a little too caught up in extrapolation.

Mr. Drysdale
16 years ago
Reply to  Bugs

“I just couldn’t help but
“I just couldn’t help but notice how much faster and more effectively the word spread about the changing market conditions this time as compared to last time.”

BINGO!

The last time we had a downturn, people came to believe and act on it so gradually that it had the effect of mitigating the damage. This time around it’s totally different!

no_such_reality
16 years ago

Hey, that’s good news. Not
Hey, that’s good news. Not the falling prices, but the decompression in pricing. If you look at the the ’89-’07 charts, what is apparent is the compression in pricing. Low end more than tripled while the high end merely doubled.

That does reflect what we saw, good stuff got expensive, but it was pittance above offal. We see the floor falling out of the low end and it needs to. The spread between low end and high end needs to re-establish itself in order of the housing market to again create move-up equity and opportunity.

You look at the last chart and realize, while the high end has come down much less than the low end, the low end is still more inflated.

cashman
16 years ago

Like I commented on last
Like I commented on last month, but still wonder about is why are the tiers so close together in price? And are they really relevant in our area due to the fact that most homes are priced over $651K. Can someone explain to me how these tiers apply to our expensive markets?

NotCranky
16 years ago
Reply to  cashman

Cashman
Active MLS listings

Cashman

Active MLS listings as of today;

up to 446k 4469 condos 5058 detached

446001 to 651k 826 condos 3896 detached

651001 up 810 condos 3811 detached

If you look at these numbers with the current combined median sales price in mind,which is in the ball park of the 446k number, you see the distribution of active listings is in line with that figure, around 9,000 properties above and 9,000 below.

cashman
16 years ago
Reply to  NotCranky

Rustico, thanks for the
Rustico, thanks for the stats. I guess it’s just an illusion that when I search the LA Times every Sunday that most of the homes seem to be price well over the $651,000 level. Of course, I’m only looking at SFDs, which probably explains some of the perceived discrepancy. But you’re right, if you look at the median prices for LA or SD counties, I believe it’s in the mid 500’s, which would give credence to the C/S tiers. I’ve just been looking in the wrong neighborhoods, the one’s where people would actually want to live!

dontfollowtheherd
16 years ago

NSR,
Am I reading this

NSR,

Am I reading this wrong? It’s late but isn’t the relativity of pricing about the same for all tiers? By that I mean if a 661k house went up 200% it’s a 1.3 million dollar home and a 441k house going up 340% is about the same price is it not? Ditto for the mid-range prices. It basically comes back to the old “you get what you pay for on the premium stuff” and the herds way overpaying for lower-quality homes. A 340 % increase of an expensive home (850-900k) would have put it in rarefied territory. Let’s face it – the average home price was significantly higher than the ranges listed so we’re talking some outrageous numbers at some point. There were many successful flippers and many more liar-loan fools that played the move-up game. When the high range price drops to 25% from peak you’re talking 40% and 50 % drops for the other two.

I see that happening easily within six months with the amount of inventory already out there and a plethora of re-sets on the way. Sandiegobanker1’s comments about internal data confirms what I’ve been hearing from people in the biz. The banks are taking a hit again today because of more defaults on credit cards and other loans. They are not in the homeowner business and can’t afford to carry their inventories for much longer. What can the gov’t possibly do to stop the inevitable? We’re looking at a 3 TRILLION dollar budget and record deficit on the table. They won’t touch the military funds even though a large portion of that money would be better served within the country. We’re going to see a recession and depression of major proportions it appears. Let’s just hope the euro doesn’t become the currency of choice.