25% Downside Yet to Be Priced In

[dontfollowtheherd]

Having been a multiple homeowner through three major r.e. market swings this one has all the signs of another sizeable downturn. Overexuberance at the onset and classic denial at the end.

At one point this past year speculators were buying 1 out of every 4 homes in SoCal(25%) contributing to the “scarcity of homes” theory. As the market dropped more and more of those with too much inventory and possible negative amortizations began dumping their homes and trying to get out from under the mortgage before finding themselves totally upside down.

There are over ten-times the number of homes for sale today in the OC, daily increases in foreclosures and the looming backdrop of 10,000 new homes that have been permitted and planned in the Irvine “Great Park” development. Add to that a few thousand homes from other developments in the county and there is soon going to be more than a plethora of homes to choose from.

There are over a dozen homes in one Costa Mesa development that started in the low $1,000,000’s about 6-8 months ago. They are already down to the low $800,000’s with no payments until 2007 with few if any takers. We can expect to see more and more “creative promotions” and then a rush to exit the market before all heck breaks loose.

[rankandfile]

All the economic indicators spell out a doom-and-gloom future for the housing industry and the economy in general. The more I think about it, the more I feel that there will be some sort of government intervention to slow the bursting of the bubble. The government at all levels (federal, county, municipal) has way too much interest in keeping homes priced at this level and keeping them from falling too far, too fast. There’s just too much money to be lost if the housing bubble plays out under market forces.

[carlislematthew]

The more I think about it, the more I feel that there will be some sort of government intervention to slow the bursting of the bubble.

What I wonder is *how* the government will do this if it is the case that only *some* markets are experiencing a downturn. Policy-wise, is there anything that *can* be done locally? Or is interest rates and federal tax cuts the only tool of any size? If the national housing market doesn’t collapse, then how can the federal government do anything?

Locally, what could San Diego county do to prevent the carnage? Personally, I think those working for the county wouldn’t mind prices dropping a little too – I don’t imagine they earn a huge amount of money.

[powayseller]

The stock market lost over $7 trillion, and the Fed “let” people lost all that money.

So far, Ben is still saying we’re in for a soft landing, but the buyer psychology has seriously shifted. What would it take to shift the psychology back, to get people excited about housing?

Another thought: even if interest rates had stayed at 1%, there is a limit to how high housing prices can go with flat wages. There would have been a ceiling anyway. Irrational exuberance usually pops with one event which reverses psychology. Then the downward momentum is as strong as the upward momentum was a few years prior. It is difficult to shift this investor psychology. What would it take for buyers to come out in full force again, i.e. for all of us fence sitters to jump back in and buy?

[sdduuuude]

Q: “What would it take to shift the psychology back, to get people excited about housing?”

A: Lower prices.

[SD Realtor]

sdduuuude is ABSOULTELY correct…sellers need to lower thier prices…

In order for the market to be efficient we really need to let it settle out on it’s own. Government intervention and manipulation of the market will not do it any good in the long run. When the tech bubble burst it was not a single pop nor was it 9/11… All the indicators were in place and it was a long road downhill… Personally I COULD HAVE GOT OUT but I did not. Should the government have bailed me out? Should they have bought up all the stock that was being dumped.

The only way for a healthy market to emerge is to let the ailing market sweat through the virus that it has.

[powayseller]

I read an analysis today saying the Fed has no control, they’ve lost control and the market is in control.

[sdduuuude]

“… they’ve lost control and the market is in control.”

Cool.

[powayseller]

sduuuude, do you think the market has more control than the Fed? I have no idea about that.

[Bugs]

I’m pretty sure the fed never intended the markets to get this distorted. So yeah, I’d say their controls have limitations.

[rankandfile]

I don’t think that we are fence sitters anymore. I’d be willing to bet that many of the fence sitters have come down from fences, walked back to their rental properties, and have decided to hunker down for the foreseeable future.

In comments concerning government intervention, I am a big proponent of market forces. I only feel that the government should intervene in very few circumstances, most notably if there is an emergency or if the public safety is at risk. Other than that the market should be left to the laws of supply and demand. One thing that sets the housing market aside from others is that it is not a true market. Too much of the sales process is controlled and not open to true market forces and increased competition.

[rankandfile]

If I had a better grasp on economics and government, I’d be better able to answer exactly how the government could intervene and slow the bursting of the bubble. One tool that I can think of at the federal level would be to slow or stop the rising Fed interest rates. Although the Federal Reserve is technically a separate entity, I am sure that they are vulnerable to political pressures similar to those seen at other levels of government.

I’d be curious to see if any politicians mention housing prices as a part of their platform coming up in mid-term elections. I haven’t heard any buzz up to this point, but then again I haven’t really been looking for it. I would think that IF the government were to intervene in any way, it should be sooner rather than later given the slow pace at which they move. But in reality it will probably be more of a reactionary or emergency-type of response. Isn’t that how Prop 13 came about? Did any policy makers see that coming beforehand? And did they try to do anything about it before things got too crazy?

[Daniel]

Luckily the Fed has a certain degree of independence. The Fed governors are named by the President and confirmed by Congress, but they don’t have to run in elections every couple of years. God! Imagine we would have elections for the Fed! I can see the TV ad: “Ominous music…Ben Bernanke has raised your rates to 5.25%! Does he care about your rising mortgage payments? No! Does he care about your well-being? No! He is a slave of big business and Wall Street! He doesn’t deserve your vote!…optimistic music follows… John Doe will slash rates to 1%! Your mortgage payment will be affordable again! Vote for prosperity and progress! Vote John Doe! This message has been paid for by the National Association of Realtors”.

Thank God we don’t get to elect the Fed. If we did, using dollars as toilet paper would actually save money.

[dontfollowtheherd]

…and they are going to pay for this how exactly? With our trillion dollar deficit? fuggetaboutit

[powayseller]

Roubini said this recession is in the pipeline, even if the Fed pauses or even eases this month. If you look at GDP growth right before the last recession, we are copying those same numbers so far. This time we have rising inflation, and last time we didn’t. Once upon a time, we Americans could grit and bear a recession just like we handled a good workout: you drip with sweat and you want to stop but you go on and on and use your hardest willpower despite the pain… that’s what we need now economically. We’ve become too pampered, living off other people’s work, sending out IOUs while the “slaves” build us goods. We Americans need to get back to the ethics of our founding fathers and pioneers, who knew how to go without things and work hard. That’s the spirit that will make this country great again.

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