Another SD housing market prediction by a smart man, here are some excerpts:

[seniormoment]

“What do you think is happening to the housing market right now?

The smart money is getting out. The inventory of homes for sale is increasing dramatically across the country. That’s typically what happens before you see price declines…. The investors who are flipping homes for profit, like non-owner occupied condominiums, those are the people you would expect to sell first. You’re already seeing that happening.

In San Diego, for example, the homebuilders themselves are getting out. I know a condominium developer in San Diego who had properties he was building, and he made offers for people to take them out of the market. He hadn’t even completed the building yet, but he was selling the condominiums for ridiculously low prices like $190,000 if the buyer would just come in and finish the floors. He was minimizing his exposure for the downturn. In San Diego, condos are off around 30% — that’s huge. Prices normally trade off 1%.

How much do you think prices will decline, and how long do you think it will take?

I think that it’s a worldwide phenomenon, and in the 25 cities that have had price run-ups, which make up 40% of the market, we’ll see corrections of 40% to 50% in real terms over the next six years. It has already started, and you’ll see it happening in more cities in the May-June time frame.
……
…..”

http://uk.biz.yahoo.com/22052006/244/growl-housing-bear.html

[powayseller]

John Talbott. Among economists, he’s the biggest housing bear. More than Shiller? That’s why I upped my 30% drop forecast to 50%, after reading his book Sell Now.

[4plexowner]

It only dawned on me this week how significant it is that some 40% of the housing purchased in the last 24 months was purchased as investments and 2nd homes.

That’s a lot of houses / condos being purchased by people who have no intention of living in them as their primary residence.

Many of these housing units are currently sitting vacant. This is important because some real estate analysts assume that when a housing unit is sold, the seller will HAVE to either buy or rent another unit.

What happens to these houses / condos when the market softens?

I believe most of them (maybe 70% ?)will end up on the market for sale. A lot of these sales are likely to be motivated by fear and desperation.

The housing units that don’t sell will go back to the bank or become rentals.

Banks don’t like to own residential real estate so they will be dumping housing onto the market at motivated prices. These units are likely to be purchased by investors for resale or rental.

It will take some time (12-24 months?), but I believe the local rental market will have a glut of new units being offered. Rents should drop as landlords compete to attract tenants.

But the really significant point that I hadn’t realized until this week is this: if 40% of the housing purchased in the last 2 years was purchased by investors/2nd-home-buyers, when those people STOP buying, 40% of the DEMAND FOR HOUSING GOES AWAY.

That means the motivated sales of housing units is occurring in a market where demand has dropped by 40%!

[lostkitty]

Good point!

The above, combined with the fact that young families cannot fit themselves into a one-bedroom “entry-level” priced condo ($400+ in a good district in San Diego) means you have the non-investment entry-level buyer sitting out too.

Then all the people like powayseller who could afford a home now, but have done their homework and see the writing on the wall – they are sitting out too. The percentage decline in demand grows and grows…..

[PD]

That is what I’m doing. I feel a little like a buzzard, waiting for the carrion to materialize. We sold our house, have our war chest ready and are watching the market closely.

[powayseller]

I can’t reconcile these numbers. If 40% of homes were purchased by investors, why are sales down only 30%? Shouldn’t they be down 40% for the investors, plus another 20% for the entry level buyer who is squeezed out?

The builders have filled this market with excess capacity. In the US, the ratio of new units/new households, which vacillated between 1.0 and 2.0 between 1980 and 2000, stands at 2.6! That means they are building 2.6 housing units for every new household. Clearly a glut of inventory. Meanwhile, we still have a shortage of housing for low-income workers.

[PD]

I don’t think all investors have quit buying. There are still some housing bulls out there. My very rich neighbor just bought a 1.2M townhouse on the water and is trying to rent it for $3,400 a month. He will buy another one if he thinks it is a good deal. I fully expect him to do what many others did in the stock market in 2000 – buy all the way down.

[lostkitty]

You forgot to add back in the ignoramus current-buyer factor… +30%. Then your numbers will reconcile perfectly!!!

Off to garden and play with my six year old before the thundestorms roll through.

[RightSide]

John Talbot published his first book over 3 years ago telling us to sell our homes because the great crash was eminent.

I guess if you publish a market crash book every 3 years, hopefully you’ll be right one of them!!

[carlislematthew]

Ahh, but he wasn’t a smart man three years ago. He is now though. 🙂

[Anonymous]

Talbot’s book is ok, but some of the conclusions he draws have no basis in facts. I think his view is a bit extreme. I just cannot envision the world wide calamity he calls for happening. We have a tough time ahead to be sure, but I do not see the banking system evaporating. If we get a 50% drop, literally no regular people will even have jobs. The world as we know it would never be the same.

Even 30% is going to be incredibly ugly.

[powayseller]

As Thornberg said, you can recognize a bubble, but you cannot accurately predict how long it will go on. His analogy is, “Don’t ask me what that crazy man is going to do. If I knew, he wouldn’t be crazy”.

Other economists have said you can recognize an asset bubble, but you cannot predict its collapse.

What Talbott did is make the points for why there is an asset bubble, and how it will deflate. Those points are still valid today, and he made them at a time when everyone thought RE would only go up. He was the visionary.

His timing was off a bit, as was Thornberg. The UCLA group predicted the bubble would end in 2003. I will write more about the UCLA group in the next day.

[lendingbubblecontinues]

“Sophisticated investor” alert!

(Referring to RightSide’s post.)

[PD]

The Bankers Assoc. said that 30.5% of recent loan applications are for ARMs. What is the current percentage in SD? There are still areas of the country that will experience price increases and people won’t get hurt with an ARM because they will be able to sell.

[carlislematthew]

His timing may have been a bit off, but the price differentials were massively off! I bought a house in 2003 and sold last summer, in Seattle. Even with Seattle prices, I made a lot of money. I ignored the acedemics because they weren’t the ones controlling prices, people were.

The problem with acedemics, and some economists, is that they pay too much attention to the fundamentals. Yes, fundamentals are important and they will bite you, and bite you hard. But people are important too.

In 2003 the prices were going up, and the vast majority of people (not economists or acedemics) were expecting the price to go up more. So they bought, and so did I. In mid-2005 onwards, the prices were going up still, but the expecatations had changed because people were changing their opinion – they were starting to believe that prices could no longer go up. I remember a study that said the the occurrence of the word “bubble” as it related to real-estate in the major press peaked in June of 2005. If enough people (the market movers) believe that prices have peaked, prices have peaked.

I believe, and I’m not alone, that it is the expectation of future gains that drives substantial price increases. It wasn’t interest rates, although that helped, and it wasn’t the lack of land. Fundamentals be damned, well at least until all the negative-amortization loans reset… 😉

[Author]

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