Emotion Distorts Logic

[michael]

I think we can all agree that many of today’s troubled “homeowners” allowed their emotions to get the best of them and weren’t thinking logically when they made the decision to purchase a home. We know that many of the “investors”/speculators” made major mistakes and assumed that market appreciation would continue ad infinitum.

I am as bearish as they come when it comes to the housing market. I think that a 50% correction on the coasts is highly likely and that a 60% to 70% correction is not out of the question.

My question is: am I allowing my emotions to distort my logic? Do I want a crash to happen so bad that I become selective in my data search and interpretation and ignore data that may contradict my desires?

I am concerned that rents have increased enough to create a floor for prices that would cause any correction to not be as steep.

Is it possible that we went through a period of asset inflation that has some permanance? My parents bought their first home for $20k in 1975 (after the introduction of our fiat currency) Prices went gangbuster and within 15 years the homes were selling at $200k. A ten fold increase. Keep in mind that core inflation in the late 70’s was through the roof! Real estate normally appreciates at a rate of 2% to 3% above inflation and that may explain some of the appreciation… or is it wishful thinking on my part and I am totally ignoring information that I should be looking at more closely.

Are we ignoring inflation this go around? Crude oil has tripled during this recent period when real estate prices increased, products at the retail level are more expensive (although not tripling in price). Is the CPI the wrong indicator to be watching? IS GDP deflator a better indicator?

I believe that easy credit conditions, narrow credit spreads, and ignorance helped fuel the run up… but am I missing something? Is my logic being distorted by my emotions?

[kewp]

I doubt it.

If wages were keeping up with the housing inflation, or there was some massive influx of foreign cash snapping up properties, yeah I would agree with you.

But when a bum can get a 500k loan? Well, there’s your problem!

I’m actually scared at this point. This is not only the biggest asset bubble in world history, it’s far and away the largest fraud as well. Over a trillion dollars of shaky loans have been repacked and are floating around the global market.

So, investors around the world aren’t playing anymore. For better or worse, the lipstick is off the pig!

[cr]

Agreed Kewp.

GDP may be a good indicator of reasonable inflation rates, but here’s the percentage changes for 2004-2006 from the previous year:

2004 2005 2006
3.9% 3.2% 3.4%

Nowhere near what housing was appreciating at.

Source: http://www.bea.gov/bea/newsrelarchive/2007/gdp406a.xls

As you said, you’re thinking logically about something that was caused by reckless emotions. You can’t understand the reasoning behind those emotional decisions because there is none.

[stockstradr]

I’m gettin’ a bit scared also. If recession is really nasty, engineers like me get laid off.

As for real estate dropping 70% in real dollars, I don’t think so. In fact, average home in San Diego isn’t going to drop 50%. No way.

Now, downtown condos may drop 50% off their peak, that I’ll agree with.

[kewp]

I’m gettin’ a bit scared also. If recession is really nasty, engineers like me get laid off.

Go government or global. Bums buying houses in Temecula are a drag, rich Asians buying Iphones or going to UCB ain’t.

Plan you future man!

[SD Realtor]

You cannot have your cake and eat it to stockstradr. Recessions equal job loss… the bigger the recession the more jobs get lost. I have posted before on this… Worked at General Instrument in the early 90s and that recession what pretty mild but it didn’t stop them from having reorgs every few months.

Once tech starts contracting it gets ugly in a hurry.

BTW I am in the same boat engineering wise.

SD Realtor

[hipmatt]

I also agree with kewp.

[mgubnyc1]

personally I don’t people didn’t see this bubble, if you couldn’t see this bubble 6 months to a year before it burst, you are blind.
One thing for sure, I’m not a real-estate expert. when I lived in Murrieta and I saw my neighbor put 70K into his back yard, 25K in land scaping 40K in furniture from Ashleys on the 14 month no payment no intrest then buy a Hummer as a 3rd car!! I took a good look around me and saw alot of the same spending going on. I realized my neighbors were only blue collar at best and no way they could afford this, I took a que from my POT smoking who sold his house to a drug dealer, so I sold my house for over 700K to a FUCKEN PAINTER!!!!!!!!!! who took a Mortage for over 680K and got the fuck out!
now i’m renting on the east coast with lots of cah waiting to get back in, don’t get me wrong I haven’t rented a house for the past 17 years, but now is the time to rent.
CASH IS KING!!!! and will be for a while

come on logic or stupid

[sogon]

If you look at an inflation adjusted chart of any boom, stock housing whatever. The down slope almost always completes into a near perfect bell curve. So depending on where you think this boom started, 2000 maybe?, then you can predict that it will fall to 2000 prices adjusted for inflation. It is also important to see that the downslope is almost always the same length as the up, showing that the bottom won’t occur until about 2013 or so.

The real X-Factor is that the government has been hiding the true rate of inflation so it isn’t all that easy to adjust the prices. It may well be that by 2013 inflation will have kept non-adjusted housing prices more or less steady.

[mgubnyc1]

unless you could find a sucker to buy your house at an inflated price, seems there are still lots of these buyers around

[SHILOH]

When you say there could be a 60-70% correction…you are talking about a bottom, when do you think that would be?
What kind of prices do you mean…with or w/o inflation.

[sdsundevil]

I look at things in terms of rent vs. owning. When it becomes cheaper to own, the market booms, and vice versa. Right now, renting is by far the better move. Long-term, I still feel owning is the better move, but I understand that’s debatable. My point is that rents will keep increasing and houses will keep decreasing until it again becomes the better move to own. Someone with more free time than me can probably produce a graph to predict when this will be.

If houses dropped 50%, that would make the median house about $250K (just guessing at this number). I would also speculate median rent on a house to be roughly $2000/mo. For $2000, you can easily afford a $250K house (P & I @ 6.5% on 250K = $1580), so prices can’t drop that far. $2000/mo basically affords you a $315K house @ 6.5% INT, so I would look at that as the floor, and I think that’s too low, so basically prices can drop no more than about 35% using this theory.

It’s my feeling that the Fed will lower the prime rate, therefore resulting in lower overall interest rates, which will help all the ARM resets and also generate more home buying. It won’t solve everyone’s problems, but it should alleviate some of them.

[stansd]

I have a model I could use to easily estimate this…if someone can tell me how to post an excel table, jpeg, etc. in here.

[Anonymous]

Real estate does not appreciate at 2-3% OVER inflation. I believe that the real figure is more like 0.5% to 1%.

The 1970’s also saw a large increase in the # of new households as baby boomers entered the age at which they wanted new housing.

Now, the baby boomers are going to want to get out of housing for retirement.

[Anonymous]

go government or go global! Plan you future man!

yeah, the government told me what it thought about theoretical physicists: go cheney oneself.

And there’s plenty of native Chinese anyway.

[Author]

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