Contrarian

[bubba99]

I believe strongly enough that the housing market will “adjust” that I cashed out and am living on out boat. But with everyone talking “bubble” I wonder if the market will hold itself together without a dramatic adjustment. Markets have a way of proving the conventional wisdom wrong.

What if the market is not efficient and buyers and sellers alike make decisions based on emotions instead of financial logic. Assume for a moment that five years have passed without the bubble bursting as discussed so widely today. What are the factors that could prevent home owner from drowning in a sea of debt and overpriced homes and losing their dream houses?

The following may be factors:

– Home owners will do anything to hold onto their dream houses. Where ever possible they will sell everything else to keep their home. This includes borrowing from family and friends.
– Home owners have a lot of unused credit already established against their homes and can tap into that for billions of spendable dollars
– Moving is hell, and as prices start to fall many home owners will just sit out the negative equity situations to avoid admitting failure and suffering the pain of moving into a rental.
– For prices to really begin falling, appraisers will need to begin to lower their inflated estimates. This is contrary to their own interest. They will continue to appraise based on what the market will pay – not what truly protects the lender.
– The lenders will continue to urge the appraisers to appraise at sale value because they want to make the loans. They are going to sell these off to FNME anyhow. The lenders will work overtime to make loans work because it is in their interest to sell them.
– Many homeowners do not understand the concept of a mortgage foreclosure and its limitation on owner obligations. They do not understand that the property is generally the limit of their liability. They do not know that the lender has little recourse against other assets or future earnings. They believe that the foreclosure will continue and they will also lose savings, cars etc.
– Banks and other lenders will work overtime to avoid an unmanageable rash of foreclosures. They will do everything in their power to avoid holding dozens of foreclosed properties that they cannot sell.

Although everything points to an un-manageable depression in housing prices driven by shocks from dramatic increases in mortgage rates and the shock from ARM adjustments, markets in general have a way of smoothing the blows. Of course our last emotional market (the dot coms) blew up and lost trillions almost overnight. And housing is the same type of market with prices based on something other than market fundamentals

[powayseller]

Prices are already dropping, sales are down to the tune of 40% in June 06 vs June 05, and inventory is rising. The bubble has popped. Nationally, it appears orderly, but in overheated markets like this, it is not orderly at all, the ship has turned and by the end of the year, the layoffs in construction and retail will really pick up, ARM adjustments will lead to more inventory….

As far as the banks, that is a wild card. I suppose they can refinance their borrowers, but ultimately they will not give away money. They are not non-profits or homeless advocates.

The only hope is that the ARM holders can find a loan they can afford. That will save the bubble a little longer.

You forgot to mention that our economy is totally dependent on rising home values to fund consumer spending. Even flat home prices will cause a recession, as consumer spending cannot continue without rising home prices from which to obtain the money that is not coming from wages. Real wages have been flat for over 10 years, so the rising home prices were used to supplement income. That gig is up.

Global banks are raising interest rates, Japan is ending the carry trade.

The party is ending.

[Anonymous]

Chris Johnston

I have had similar thoughts. I began to think that too many people were in the bubble camp, and as a result, the big drop would not occur. As a trader, I always want to be opposite of the consensus of the public. However, I do not believe that the majority of the public believes it will happen.

Only a few of my friends believe it. Fortunately, my good buddy the RE mogul is one who agrees. His opinion matters a great deal to me. I am shocked at the dramatic sales falloff that is occuring this month. 40% in one month is an unbelievable number. I did not think even in a major crash, we would see that type of dropoff.

It is almost as if, the big drop literally is just hitting right as we speak. The psychology of the whole situation, is what equates it to the stock markets. It is also why, the same thing is going to happen, even though it is a completely different type of asset.

There will be a time when everyone is convinced it can only go down, and that is the buy spot give or take 6 months to a year.

[barnaby33]

Its unfolding a bit fast, but think about it. Even if we didn’t have job losses and even if everyone who took out a mortgage could somehow keep their jobs, interest rates are up quite a bit from their 04/05 lows. That alone spells doom for the RE speculator crowd. Again lets go out on a limb here and assume that for every house there is a greater fool. Todays greater fool can qualify for a much smaller loan than yesterdays, even with the most exotic of programs. In RE market terms this is unfolding FAST!

I remember a year ago when one of my co-workers thought 07 was going to be ground zero(I was a bit incredulous.) It may still be, but its looking like fall of 06. Time tables are moving up.

Interest rates are up, check.
Job market is flat, check.
Credit standards are rising, check. (This is the last nail in the coffin.)

What I came to love about Rich’s analysis was that it was conservative. He showed you the facts he had but drew fairly conservative conclusions. The more reading I have done, the more this becomes apparent. Besides anyone who is reading this blog is a contrarian, so Chris you are still ok.

Josh

[Bugs]

Just as with the ride up, I think the ride down has the potential to take on a life of its own. That’s why the highs and lows don’t just return to trend, they overshoot.

[kewp]

The big point you are missing (perhaps intentionally), is that a substantial chunk of SD RE assets are vacant investment properties. The owners have no emotional investment, other than the sticker price, and moving is a non-issue. They will unload these as soon as they realize the markets turned. Expect the frenzy to increase as the speculators move from profiting to minimizing losses. This is turn will put pressure on everyone with an exotic loan to bail out or eventually foreclose.

True, folks that have been here since pre-bubble days and aren’t dependant on the RE industry will probably stick around. I don’t think anybody doubts that.

[powayseller]

A vacant house on my street has been on the market 141 days, and the price reduced twice, from $545K to 535K to 525K earlier this month. The owner died in the house. But the heirs seem in no hurry to make significant price reductions. Perhaps they can afford the carrying costs.

Now get this: zillow is showing his property’s value change in the last week as NEGATIVE $5,316.

I checked my house that I’m renting, and it lost over $5K this week.

Zillow is showing the declining market.

[kiki]

i feel that zillow is overvaluing houses. houses on sale priced well below zillow value are still sitting on the market.
This one for example :10151 PRAIRIE FAWN DRIVE in rancho bernardo.
Zillow value $804,741 – $1,010,397, zestmate $894,157

now is being offered 740,000 down from 775,000. i do not know when they dropped the price but still is not selling.

last sale 10/29/2004: $734,500

[powayseller]

Yes, zillow is WAY overvaluing some houses. Some people say zillow is accurate.

The house I mentioned is quoted by zillow in the high 600’s, but is listed for sale at $525K. It is probably worth only $480K.

I like zillow for the sales history info. For valuation, it is useless to me. What does Bugs think?

[sdrealtor]

My house is 200k below what it would realistically sell for and my next door neighbors is 100K too high.

[powayseller]

How much did your house lose last week?

[sdrealtor]

I didnt check last week but it has pretty much been the same for several months. It is also off on BR/BA count, garage count and sq footage. When I increase the sq ft by about 200sq ft, correct it to a 3 car garage, add 1 bedroom and the extensive upgrades to my house the zestimate goes down 100K!

[sdappraiser]

Zillow is useless as an analytical tool – kinda cool, but should not be considered accurate. It’s a computer driven algorithm that does not accurately quantify view, lot, location or condition amenities.

I’ve lost (paying jobs – sorry rankanfile – don’t vomit again) to AVMs similar to this. The lender preferred to save $300 on a $600,000 loan and rely on a computer model instead of having a pair of eyes and ears view the property to verify.

Their loss.

[docteur]

I have to agree with SD Appraiser. Zillow is all over the place — high in some areas and low in others.

It is worthless as far as giving an accurate picture of value is concerned, especially in a market such as we now find outselves. Total rubbish.

The home next door to me just went into escrow at a sale price that was more than $ 300,000 above the current Zillow value. I’m sure when that sale closes in a few weeks, the value of my home will magically increase and jump another $ 300,000 (or more).

Here’s another example: Scott Street and San Antonio Place in Point Loma have a row of houses right on the bay. Zillow lists two properties I am interested in (not on the market) one at $ 801,000 (a double lot) and another at $ 1.13 Million.

Both properties have a private dock (there are only five homes on San Diego bay with a private dock) and the minimum value of either of them is easily north of $ 6 Million (I would buy either one of them at that price in a New York minute).

Those values Zillow has for that area are probably based on very old sales (because no one sells in that area except maybe once every few years). The last listing on San Antonio Place was a new home (which was recently pulled off the market – why I have no clue) which was listed around $ 7 Million and another spectacular home to the west was listed at $ 9.95 Million (off the market also).

The most recent comp I have in the area with access to a private dock was a home that sold about two years ago for $ 5 Million plus in overbid. That homes shares a private dock. Zillow has the home next to it valued at $ 1.01 Million. I WISH I could buy that home at that price.

Zillow isn’t even close in value on any of the homes in that area, which number in the dozens.

Only a fool would rely on Zillow’s valuations.

[an]

Zillow has a long way to go to get the valuation correctly. It’s still in beta stage after all. I use it for its sold history. Which is quite useful to see who need to sell and who have room to work on the price, if they didn’t refi and pulled cash out already. I think it’s a very good platform though. If they combined with something like ziprealty.com, it would be amazing source for hunting for house and find info.

[Author]

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