Dean Baker: The Coming Housing Crash

[Anonymous]

IMHO, in five years or so, this site, and other bubble sites like it, will have been largely discredited.

My reasoning is simple. Prices have gone up 150 percent or more in San Diego and other Cali metro areas over the past 5-6 years. Unless prices decline signficantly over the next few years, then, ipso facto, there has been no bubble and this and other sites have been quite wrong.

If something goes up in price 150 percent and then goes down 10-15 percent, that is not a bubble, that is a serious runup in prices followed by a relatively minor retrenchment.

And I don’t think we are going to see major declines in prices. I expect nominal price declines in the order of 10-15 percent over the next 3-5 years, followed by flat prices for another 3-5 years. That is not a bubble-bursting scenario.

I hope I’m wrong, because I’d like to buy some real estate.

[equalizer]

Daniel

This summary of housing concern in website below probably the same as in the primer but it is very good. Please take a look. The charts are awesome.

Rich
Do you think this link deserves a permanent place in the primer?

http://www.contraryinvestor.com/mo.htm

[davelj]

Yup, I’m with Rich word for word. I’m a major real estate bear and on the fundamentals ALONE you could come up with lots of otherwise logically bearish conclusions. But having lived through the Greenspan era as an investor, one can never ever underestimate to what ends the government will go to defer economic pain into the future. Nothing is out of bounds, I’d say. Thus, a 30%-35% decline in the median price seems about right to me, as I’ve posted before. I don’t, however, trust the government to let the market get to a “true” equilibrium over the next few years (such as a 50% decline). After all, we never reached equilibrium on the Nasdaq (well, yet…), why should the housing market be any different?

[powayseller]

Rich -what is “monetizing mortgages”?

Davelj, we *have* reached equilibrium on the NASDAQ. Pull up the charts back to 1998. We’ve been back to 1998 pricing for several years now.

[powayseller]

batleft- What? “Unless prices decline significantly there is no bubble”. What kind of logic is that? It’s a factual statement. I don’t get your point.

[Steve Beebo]

I pretty much agree with Batsleft’s statement – “If something goes up in price 150 percent and then goes down 10-15 percent, that is not a bubble, that is a serious runup in prices followed by a relatively minor retrenchment.”

Even if prices were to drop 20-25%, which I don’t think is likely, I wouldn’t exactly call that a bubble bursting.

Now, if inventory levels in San Diego reached 45,000-50,000, similar to what Phoenix has now, we would have an incredibly big problem. But it seems like inventory has leveled off in the past month, stuck around 23,000+ as measured by ZipRealty. It will be interesting to see where inventory levels are at this fall and winter.

[PD]

It seems like some people are thinking that a 15% reduction can be computed by simply wiping away 15% of the gain. It doesn’t work that way. A 15% reduction equates to a heck of a lot more money than simply wiping away 15% of the gain.

A 15% or 20% reduction would certainly be the bubble bursting!!!

[powayseller]

Steve, isn’t months inventory more important than the inventory number? If we had 50,000 inventory, and 55,000 sales per year, prices would go through the roof. The problem is that sales keep falling at a greater rate every month. First, we were down 10% yoy, then 20%, etc. We were down almost 40% in July 06 over July 05.

Let’s assume inventory stays flat through the end of the year, and the downward accelerating sales trend continues; prices will drop a lot. Months inventory is the important metric from what I have learned. Do you disagree?

Rich, I still don’t understand monetizing mortgages. What is “pinning” the mortgages? Yes, the NASDAQ is still too high, although it has been back to its 1998 level for a couple years now. The P/E ratios are still too high. What do you think accounted for it not fully retrenching; rising consumer demand?

[mephisto]

Here’s my take on it. Background: I own, well within my means, and think prices are going to drop. And I hope they do, so I can buy a bigger place in a year or two.

The thing about these bubble boards (and I frequent several), is they are primarily filled with people wanting to buy. These posts and sentiments are *everywhere* on bubble blogs/forums.

Yes a lot of speculators are going to lose their shirts, and a lot of soccer moms who bought million dollar homes with 0 down and teaser rates are going to get destroyed.

But, for each person I know like that – I know someone else on the reverse side. Not everyone is a complete fool with money, or living their life on the credit express. There are a lot of people (at least that I know) sitting on huge piles of cash, making very high salaries. I know (conservately) at least 10+ people who are all planning on buying in the next 2-3 years if prices come down some.

If you bought a place 5 years ago say for $300,000. And today let’s say it’s “going” for $600,000 (very conservative). Lets put all other things aside (taxes, maint., etc) and assume a normal rent of $1,500 a month. 5 years of rent is $90,000. Seems to me this person is going to be just fine despite any price downturns assuming they didn’t do anything stupid.

I guess my point is, yes a lot of people did stupid things. But there are a lot of smart people out there as well. There is a very large pool of people waiting to buy – who can afford it and have been saving like mad.

Prices are going to drop I’d say 10-20% depending on the area (yes a dumphole in Temecula or out in the sticks may drop 50%). Then a few years of stagnation. I think you’ll find as soon as prices go down the 10-20% range there will be a whole new flood of buyers that keep prices somewhat stagnant.

And for every “FB” who is about to go under, there will be a circle of vultures all ready to buy at a discount/upon foreclosure.

Gap between the rich and the poor increasing. Nothing else new here.

It’s easy to search the MLS for the few people who are taking a hit. But you can also search and find a large pool of people who made hundreds of thousands of dollars selling homes the last few years.

Just my .02.

[technovelist]

I’m pretty sure the people you know are not representative of the general public. As I understand it, most of the loans made in the last two years in California are “suicide loans”, so there are hundreds of thousands or possibly even millions of people just in California who are going to be demolished when reality hits. I think it is extremely unlikely that there are that many people with huge bales of cash standing by waiting to buy “bargains” at 20% off the peak prices. And why should they, when prices are still dropping and interest rates still going up? Why not wait until prices and interest rates stabilize?

[powayseller]

What percentage of the San Diego population meet the criteria for this group that you describe?

The median family income, according to the 2004 Census Bureau is $51K. My bet is that for every vulture with $500K saved up, there are 300,000 people below the median wage scared to death of their ARM, HELOC, and credit card payments going up.

Since you are into anecdotes too (like me), next time you go to the gas station, walk by all the pumps and see how many people filled up. Then, go to the mall and see how full it is, and how many people walk around without any shopping bags.

One more thought: the housing prices are set by the solds. In July, it was 2500 or so solds in San Diego that set the prices for the other hundreds of thousands of homes. The people who NEED to sell are setting the price for everyone.

Oh, and one last thought: after foreclosures really pick up, Fannie Mae underwriting guidelines tighten, and the FDIC puts rules in exotic financing, the tighter credit will make it harder to buy a home. Buyer fear will reduce sales even more. Who will even want to buy a home next year? As buyer fear increases, the buyer pool shrinks. Your vulture friends, like us here, will wait even longer – they will think “Hey, why buy now when prices are dropping so fast – let me wait until next quarter and see if they have stabilized”. Fear works in reverse of frenzy. On the way up, sales accelerate and on the way down they decelerate. There is not sucker’s rally as in stocks. Just fear that grows.

[mephisto]

>>
The median family income, according to the 2004 Census Bureau is $51K. My bet is that for every vulture with $500K saved up, there are 300,000 people below the median wage scared to death of their ARM, HELOC, and credit card payments going up.
<< Again, it all depends on the person. So the majority of people don't make enough money to actually be able to afford some luxuries. Yes, that stinks - but that's life. I don't recall being given a handbook saying one day I will be able to afford a home, a yacht, a big HD TV, or whatever you want to fill the blank with. If you flip burgers, and your combined yearly income is $51,000 - then yeah, I'm sorry but you probably won't be able to afford a home in San Diego, or a lot of other luxuries. That's just my honest opinion. There are a lot of people making a lot of money out there. Shoot, my first job paid way more then $51,000/year when I graduated school. I know single waitresses making more then that a year. I think your 1:300,000 ratio is a bit off - my opinion. Percentages don't always tell you everything. I fall into the "exotic" loan catagory with my interest only loan. Then again, I put 20% down and have stockpiles of cash in the bank to cover the rest. Yet, I'm still counted in the pool of "FB'ers with exotic loans." I just don't think there is as much doom and gloom as people on these forums think. People still buy stocks after that bubble burst - and quite a few people made a lot of money. Others learned there lessons, some didn't. Life goes on. Not everyone is treading water burried in debt. Don't understimate the amount of people making huge amounts of money. Just my .02.

[PD]

If you have stockpiles of cash, why would you ever get an IO? You must be counting on appreciation.

[PD]

You also said further up that you live within your means. Having an IO is not living within your means.
Just my .02

[mephisto]

—
You also said further up that you live within your means. Having an IO is not living within your means.
Just my .02
—

I could pay off the rest of my mortgage tomorrow in cash.

My other investments earn a lot more then my effective 3% mortgage. And I have a guaranteed fixed 5% fixed rate mortgage at the end of my term.

For me, I prefer this a lot more then the $1,500/mo rent I’d be spending otherwise.

Again, it all depends on the person. But, again, if you focus only on the negative – then your analysis makes sense. 🙂

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