Biggest Drops in 2007 and 2008; housing will fall 50% nominal terms

[woodrow]

PS – I thought that you believed the median price was a lagging indicator that was at the very least a year behind? Now you’re using the fact that the median has only recently gone negative to support an argument that “this is just the beginning”?

IMO, we should be able to pinpoint the beginning of this slowdown/downturn when monthly listings began to dramatically overshadow sales. My guess is that began in the spring/summer of ’05, and we’re now just getting to the free fall period. The ARM resets in ’07 and ’08 will lengthen the fall, and by ’09 San Diego will return to a market with a semblence of normalcy. If I had to take a guess, I’d put the over/under at a 35% fall from November 2005’s high before we reach the bottom in fall/winter of ’08.

[Bugs]

Please note the difference between “demand” and “effective demand”. Effective demand is a stool with 3 legs: desire, personal means, and financial leverage. Personal means includes factors like wages, downpayments and personal credit. Financial leverage obviously deals with the availability AND TERMS of the credit necessary to bridge tha gap between downpayments and sales prices. Take one of those legs out and the stool won’t stand.

If/when the foreign investors stop propping up our credit markets our interest rates are going to go up. If/when lenders and secondary investors start taking heavier losses on their RE – backed investments, interest rates will go up. Already, employment/wage verification and other underwriting criteria are going up. The reduction or even outright elimination of liar loans will have an outsized impact on the number of people who can buy at any price. If the U.S. Government has to close down a bunch of lenders because of losses in their residential portfolios, the remaining lenders could easily be compelled to return to hardwired 30% income ratios for purchases.

I also wouldn’t get too attached to the idea that a sub-8% mortgage interest rate is an economic entitlement that can be counted on in perpetuity. We went for a long time thinking that 10% was a good rate. I’d be downright shocked if by the end of this downcycle we weren’t back well above 8% interest rates.

Contrary to a couple comments about rents, I also point out that rental rates can and do decline during times of distress. It happened here during the mid-90s in the apartment market (and to a lesser extent in the house market) because it was overbuilt during the 80s. Now that our houses are overbuilt and apartment rentals have declined in some areas, I think that the recent gains in the house rental market are very squishy. It’s a stopgap measure attributable to investors trying to ride it out and the demands of the mortgages.

Another reason I think it’s squishy is because the impact of the declining market has only barely begun to be realized among the ranks in the RE and related industries and in those businesses that are dependent on discretionary spending. I don’t think it’s an overstatement to say that the cumulative effects of the decline of the RE industry could well turn out to be as dramatic here in SD as those caused by the decline of the defense industry during the last downturn.

I think we’re a long ways off from bottoming out.

[PerryChase]

Bugs, I enjoy your posts. You said it very well and that’s what I beleive also.

10% interest rate would not surprise me in the least.

[cabinboy]

Powayseller, you may have reached the point where you’re a bit too in love with the outcomes you’re predicting. Your posts are packed with predictio upon prediction each being less substantiated than the next. Most on this board agree that the the coming drops in RE prices will meet or exceed what happened in ’89-’95. This prediction comes primarily from the fact that our deviation from historic price appreciation is greater this time than the last, and the affordablity index is even lower. All reasonable. Now, opinions on this board begin to diverge as we discuss the impact that this RE drop will have on the overall economy, and most important to the individual investor, the future prices of stocks and commodities. Your doom and gloom predictions for the economy and stock prices as a whole are very aggressive, and represent a minority position even among bears (Roubini aside).
If I take Lereah’s advice and buy a home right now, I’m sure to realize a loss. If I get too influenced by your position, I’ll be 100% in cash (foreign currency, of course), and I’ll no doubt miss out on some nice gains (many mutual funds performed very well in 92-96, despite RE’s troubles). Granted, a loss is more of a bitch than an unrealized gain, but both will affect one’s living standard and retirement over time.
Be careful of falling into the same trap as the RE speculators. This board is highly populated with folks who sold RE in 2005, some by chance and some by foresight. Those that did are no more a financial genius than those that haven’t sold (though they likely do have an edge on the small % of folks who recently bought). If your portfolio of cash is not significantly larger in 2010 than it is now in 2006, you’ll have lost ground to a lot of moderates who are skilled at making money in a variety of markets outside of RE.

[JES]

My ‘instincts’ are telling me there is still alot of demand out there, but that most of it is on the sidelines waiting to see how far prices go down. People go to open houses, look around, hear about price drops and leave with the intention of waiting it out.

It is also clear to me that current inventory levels far outnumber those that can afford to buy, even if they all choose to buy today. IMO price drops will cause a monthly rise in sales of homes on the way down, except for the beginning, so the drop will level off over time and be more pronounced in the early months. We may not be in the ‘economic’ beginning of the downturn now, which may have happened last summer, but we are surely in the ‘psychological’ beginning.

Psychologically, most people are just realizing this is happening and most will not be in any mood to ‘grab deals’ anytime soon. But once we see drops of say 15% or more, IMO some fence sitters will decide to buy, say next Spring or sooner. Psychology again. People will buy into the idea of a Spring bounce. But prices will continue to fall an addl 10-20% due to a worsening economy, ARM resets and rises in new listings that outpace sales.

IMO I am being conservative and here’s why:

-What if a very bad recession starts before next summer? Not only are we on the road to one already, but the possibility of war with Iran, Korea, an all out civil war in Iraq, Israeli/Arab war and continued terrorist strikes make it even more likely.

-What if none of the buyers on the fence decide to buy? So far, the news, the economy etc. have been relatively good and most still are still not buying. What happens when ARM resets, geopolitical and economic news rain down like the perfect storm? Would a 25% drop in prices be enough for you to put aside news of massive job losses, a recession or impending conflict?

[powayseller]

sdrealtor said, “All the points you make relate to the sellers distress rather than the buyer’s willingness to buy. I am looking at things from the buyer’s side which your comments ignored.” WRONG, FONG! Read my post – the whole thing was about a buyer; they won’t buy depreciating asset.

biggest drops 2007 – 2008 as ARMs reset, inventory doubles, buyer fear sets in; all those looky loos at Open House will be sitting at home next year; sales will keep dropping;; fear in reverse; tighter credit; months inventory puts more downward pressure, as does REOs;

how can you get a feeling about the future? one cannot “feel the future”, it’s Delusional Dreams.

[powayseller]

median is lagging; yrs 3-5 will be biggest drops in median if history is a guide; we are in year 2 of slowdown, and 2007 and 2008 will be biggest losses IMO

i covered slowdown at length, search archives; started 04/05 at low end

basically i agree w/ you

[sdrealtor]

Exactly my point. Because the median is lagging you might see the biggest drops in the median occur in 2007 and 2008. However, in real time the biggest drops are occuring right now and will continue through the end of 2007. I don’t care about the median, I only care about what a specific house can be bought and sold for on a given day. We are arguing the same point

[L_Thek_onomics]

Yes, the median price is not a good indicator of changing markets. As always, when the housing market looses the steam, the more expensive markets turn upside down first. The largest proportion of sold homes are in the higher price ranges, because of more attractive discounts. This trend pulls the median upward, creating an absolutely misleading, almost useless “indicator”. The opposite is true for the lowest median price. When the median price hits the bottom, the best deals are already gone…
L Thek

[(former)FormerSanDiegan]

When the median price hits the bottom, the best deals are already gone…

Not really. 1995/1996 was a great time to get a deal in SD. Plenty of deals, buyers’ market. In April 1996 we looked at 30+ homes, asked for and got a 90-day escrow so that we could save up the remainder of the down payment 5% and finish our lease.

[powayseller]

Delusional Deep-Slumbering Dreamer sdr wrote “in real time the biggest drops are occuring right now and will continue through the end of 2007.” Keep dreaming…..don’t let me disturb your sleep… it’s nice and warm and cozy in that bed and dreamworld now….but in 2008 a bucket of cold water will splash on you and jar you to ARM-Reset Reality.

That’s the land of $2 trillion of nationwide ARMs resetting, biggest rise in NODs and foreclosures, 10% unemployment, tough lending guidelines, and buyer fear, i.e. nobody wants to buy.

Remember how the bottom of asset bubbles end: nobody wants to buy. Fear reigns. Baby, we’ve got a loooooong way to go to asset bottom.

Signed, Arrogant Powayseller

[no_such_reality]

I think there is backlogged demand out there too. I also think it’ll vaporize as the numbers quickly head to their mental numbers. More importantly, it’ll vaporize as they realize, they don’t just have one good deal at their price, they have a dozen in the neighborhood they’re looking at.

[sdrealtor]

Arrogant Fear Mongering Powayseller,
I only report on what I am seeing. If things play out as you believe I will be more than fine. I am in a great position, have a handful of business opportunities in development the last few years and see only great success ahead for my family not grey clouds. If there is a cold bucket of water, I will enjoy taking a drink. If they dont play out as you believe I will also be fine.

You have everything at stake at being right while I have little or nothing. You live in a world dominated by fear and make all your decisions that way. You cannot see past it and dont understand that there are many people in this world that dont share your fear based persona. Fortunately, I am not in such an unenviable state. The most successful people I have met in this world (there have been many) do not operate out of fear. They understand how to create wealth in good and bad times. They have confidence in their abilities which you don’t. I hope you one day get past all your fears because life is much better that way. Not being afraid to take chances does not make someone a fool.

I sincerely hope your new endeavor works out well for you. You are obviously very bright, but as they say, that and a buck will get you a cup of coffee. Also remember than when you start you business, the key to its success will be your sales abilities.

Best of Luck

SDR

[HLS]

Interesting thread, is it time to review the prediction made 21 months ago ???

[HLS]

Interesting thread, is it time to review the prediction made 21 months ago ???

[Author]

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