Horrible Journalism “Bubble Sitting” by cnn.com

[Bugs]

Market psychology is an interesting thing. It’s one reason why the bubble transcends national boundaries. I think that if SD and other metro areas in the US suffer the big correction, that correction will extend to every other distorted market in the U.S., and may even touch some of the heretofore stable markets. I also think that if the trend for correction overwhelms the U.S., it will also affect all the other bubble markets. It may be that London did the dead-cat bounce because on a global basis there isn’t enough panic yet.

[powayseller]

Bugs, I would like your input on how you would time the real estate market. These metrics haven’t been around too long, but is it possible to do a chart of months inventory going back to the 1970’s. Also, how do you explain that the SD price/income chart goes up and down so smoothly, without any intermediate rallies? Is this because real estate is a slow moving ship (using Rich’s term)? Once it turns, it moves in one direction only, with some noise here and there?

[Daniel]

Well, what can I say? Good luck and more power to you! As for when I’ll buy, it is going to be when my favorite metric (present value of future rents divided by future homeowner costs) gets back in line. But I’m not kidding myself that I’ll be able to “time the bottom”. Once I find an entry point that looks reasonable to me, I will choose buying over renting. If the market continues to go down a while after that (overshooting on the down side), I won’t sweat it.

[Bugs]

I don’t have access to the long term MLS listing data and I doubt that even the boards that comprise the MLS here in SD County have it.

“Timing” the market before it does its thing is not possible, in my opinion. There are too many variables, some of which have nothing to do with “what should be”. There are some things we can do to narrow the possibilities down, though: extrapolate past trends into the present and near-term; watch the micro indicators as possible precursors to the macro trend; and try to understand the “why” of what’s happening as well as the “what”. That’s pretty much what we’ve been doing here.

Beyond that, there will always be some risk due to the X factor of human irrationality. We can manage that risk to a certain extent but I don’t think we can avoid it.

As an example, many of us on this forum (and even Rich) were aware that the trends for increases couldn’t continue and there was a problem; but nobody could have forecasted in advance exactly when that peak would pass.

Although your own example was about as close as you can get – you guys were questioning that last $20,000 – but it did involve a certain amount of luck, too. Had you stumbled onto the various internet sources a few months earlier or a few months later your timing would probably have been a little different. I don’t say that to detract from your success because it took a lot of hair to make the decision you made when you did it- I only mention it to point out that had you come to that decision a year earlier you would have left a little more money on the table, just like a few of our other posters.

[Bugs]

Oh, and I anticipate there may be a dead-cat bounce here; possibly as a result of a stabilization of mortgage interest rates.

[powayseller]

If I had used months inventory as a metric, I think I would have thought of selling between summer 04 and summer 05. My only problem was that my house was under construction and not complete until 9/05, so I really couldn’t sell before. Additionally, I did not have the knowledge I have now. Back then, I didn’t even know we were in a housing bubble. I thought prices would stay this high. I didn’t know the majority of buyers were getting interest only and neg-AM loans. I was clueless. But I did know enough to not buy any homes during the runup. It seemed too crazy to buy.

I would be happy to buy within 5% of the bottom. I don’t think I’ll get stuck on any dead cat bounces if I use a knowledgeable realtor plus data. The realtors will be the first to know when activity picks up, long before the data shows it.

I think everyone here will know when the bottom is also. We are all using the same data, and we have very good realtors here who will inform us when activity starts picking up.

There are other factors to watch too: reduced HAI (a NAR quotient combining income, price, and interest rates, where 100% means the median income can afford the median home price and CA was a dismal 14% last December), rising employment, population inflow. So I’m waiting for a turnaround in the economy, before the media gets the word out.

[Bugs]

Trust me, if you’re watching the market at that time you’ll see the trend turn long before the media catches wind of it.

[smfj]

Diego, I agree with you 100%. There’s no way someone like me is priced out of the market forever – I mean really, in the long run, who the heck else is going to buy a one-bedroom condo other than someone like me, or an investor who will be expecting cash flow? It’s just really sad to see the way that some otherwise intelligent people my age have bought into the “it’s now or never” hysteria. And the tax deduction thing is a pet peeve of mine – my friend, a fellow CPA none the less, just bought an extremely overpriced home because they “needed the tax deduction.” Obviously, your incremental tax deduction increase due to your mortgage interest should play into your rent vs. buy analysis, but you never spend money just for the sake of a tax deduction.

Sorry this is such a delayed response – I was out enjoying my weekend being a suicide-loan-free kid.

[studenteconomist]

Powayseller,

The problem with timing the market is that you have to combine fundamental analysis with behavior finance. The fundamentals can all be there, but you have to know what the physocology of the buyer is. While the fundamentals may indicate a good time to buy (which is when I want to buy) the public may not know this for a while still. Since aggregate market behavior can be irrational and last longer than you can stay solvent, you cannot really predict the absolute bottom. Even knowing what the realtors know will not be sufficient to know the aggregate market physocology. I think most of us would be happy buying around the trough, but knowing that it may drop a bit more or take a few years to climb out of it.

[powayseller]

Shifts in buyer behavior show up in the changes in demand and supply. Thus, the 3 indictors that I mentioned. Realtors will be the first to see the shift in buyer behavior. They are one of the indicators I mentioned. As demand picks up, months inventory will peak and decline.

It is disappointing that none of the real estate experts, Real Estate Centers, or economists have provided real estate cycle forecasting tools. So I have provided a forecasting tool myself, and in the absence of any others out there, is what will have to do. Time will tell if it works.

[an]

What you described as a bottom can also occur in a dead cat bounce. People will think it can drop any lower, and now is the time to buy again. Some will start buying and cause the dead cat bounce. This bounce can possibly make you think it finally turn around. In stock market, dead cat bounce can last 1-2 months before it start turning down again. Since RE is much slower, my guess is it can bounce for many months in RE before it turn down again. That’s why it’s impossible to predict the bottom or top. That’s also the reason why many people sold in 2003. They start hearing about the bubble and believe it and sold. So, bottom line is, we all hope and try to time the bottom, but I’ve been humbled by the market too many times to think I can truly time the market. I would be happy to by when it’s makes financial sense to me, i.e. compare to rent, even if it drop some more.

Also, although good realtor will know more about the movement of the market than the average person, they still can’t have a feel of the whole market. They might know about 200-300 houses personally and know the sentiment of the buyers and sellers of those houses, that’s still only about 10% of the market. There’s a possibility that 10% of the market move in the wrong direction of the market and cause the dead cat bounce scenario.

[powayseller]

2003 was not a dead cat bounce. Those people acted on fears, not data. Nothing you have said so far disproves my theory.

Disproving or proving my theory would require data of months inventory from the last cycle. Without that, only time will tell.

I was told that real estate is a slow moving ship. It moves in one direction, and takes many months to peak and turn. This time, the market softened in 2004, and it wasn’t until TWO YEARS later, in summer 2006, that the median went down. But months inventory changed already in 2004. It has not done any dead cat bounce since then. Inventory has been climbing steadily from 3,000 in march 04 to 6,000 in June 04 to 12,000 in Sept 04 to 23,000 today.

Perhaps you could find an example of where the inventory dipped and rose again since 2004. Then if you find that, we can check the sales and go further with this test.

Real estate moves very slow. It is not like stocks at all. No dead cat bounce.

You can have variations in new housing starts, permits, and all the stuff that manufacturers do to vary their work flows. But consumer demand and supply seems to be a very slow sticky type of thing.

Of course, if I am wrong, I want to be corrected, but all the things that people have written above, is not disproving my theory at all. Saying that I can’t possibly be right is not proof of anything.

Similarly, I cannot prove my theory without the data. So we are on even ground.

All I can say is that I will use this model to time my purchase.

[an]

Here’s data of median price from the last and current cycle. I’m not sure if you have this link or not, but here it is: http://www.housingbubblebust.com/92SoCalRecession.html. According to the data, the highest negative y-o-y decrease is around 1994. The rate of negative y-o-y median price start decreasing and it turn positive in last Q 1995 and 1st Q 1996. That’s 6 months of data in the + y-o-y after a 5 year – y-o-y, would you call that a good time to buy? after all, things are turning positive again. Well, if you say yes, the next year would be quite hard for you, it turn back down again and the house you would have bought probably doesn’t break even until 2 years later. That to me is a dead cat bounce.

Now, lets look at this up cycle. It’s not as obvious but if you keep too close of an eye on things, you might get trigger happy. Here’s one example. Using that same site you see that rate of appreciation increase every Q since 1996 until end of 2000. Around that time is when I remember first start reading about housing being over priced in SD from SD UT. Rate of appreciation start decreasing after 4th Q 2000 from 15% y-o-y to 4th Q of 2001 or 1st Q of 2002 @ 11%. I don’t know about you but seeing appreciation slow and fundamental is already out of whack and people talking about bubble, that might be a signal to sell, right? Well, we all know what happened after that. It would probably continue to go down from that point if Sept. 11 didn’t happen. But since it did and the Fed start slashing rates, that’s why we’re here today.

So there’s a possibility that the next time you see price start turning back up again and you think it’s safe to buy, there might be another economic shock that will drive it down further, such as major oil shortage or a war that will drive oil through the roof and cause inflation to go rampant, which will cause the fed to raise rates. Those and many factors that will affect the RE market although it has nothing to do w/ RE.

[powayseller]

Asianautica, thank you for taking the time to post this. The OFHEO median you showed is the accurate median, the one everyone should be using. (But NAR’s median, the one reported in the media, is plagued with problems. ) In the first cycle, I see that you have to wait for the median to be in a new direction for 2 consecutive quarters, if you check the quarter-over-quarter median. In this cycle, the median has been increasing every year; I don’t see a change around 2000; it keeps going up. We need to see not a slowing in rate of increase, but an actual decline. Anyway, I did not consider using median but I should add this to the model: 2 consecutive months of changed direction in the OFHEO median. Thanks for giving me this information.

The 3 indicators in my model are months inventory, realtor experience, and a change in HAI. Do you know if those 3 combined would have given a false signal at those 2 times you mentioned?

If you find evidence that my model does not work, then I will reconsider my strategy, definitely. Until then, from how I understand real estate, this is the best I’ve got.

As far as real estate responding to geopolitical shocks and high oil prices, do you have any examples from history that there were any “dead cat bounces” in real estate from such things? Real estate prices are historically linked to employment. Only during recessions have real estate prices fallen. Whenever people are employed, they can make their mortgage payment. Housing rises with inflation. It is not like a stock.

[powayseller]

This article includes a charts of listings and sales in Phoenix since January 2002. This is the type of data I plan to use. I guess I better start charting, so I have a history, and can see a change in trend.

In the graph, we can see inventory is falling, until January 2005. In April 2005, the inventory leaps up, and keeps rising. Nowhere do we see a “dead cat bounce”, i.e. inventory reversing trend, and then resuming its previous course.

Has anyone seens a chart like this for San Diego?

[Author]

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