Next Shoe Drops in May….

[latesummer2008]

Here we are at the end of April. The writing is on the wall and is getting harder to deny. The “Perfect Storm” is gathering ominous clouds, as the housing market in Southern California gets ready to TANK. How can anyone, except those who are scared, not see what is happening. We are on a steep downhill slope of the BIGGEST HOUSING BUBBLE in U.S. HISTORY. It started to pop in late summer of 2005 here and is ready to BURST.

Lets look at the FACTS. We have :

1) Grossly Overpriced Properties
2) Credit Crunch
3) Myriad of Bad Loans waiting to sour
4) End of a 10 year “Boom”
5) Wilting Dollar
6) Negative Savings
7) Global Property Meltdown
8) Declining Economy
9) Bulging Federal Deficit
10) Shaky Consumer Sentiment
11) Growing Stock Market Bubble
12) Bloated Inventory of Unsold Houses

The list keeps growing…..and growing..and…growing..

And here comes the summer selling season in housing!
I believe we will start seeing significant price drops in most areas of S.Calif beginning in May. This summer, many areas will be HIT HARD. As sellers begin rushing towards the exit, a cascade of price declines will follow. IMHO, the “BUST” will be fast and furious, unlike what most people are now predicting.

I am sticking by my estimate of “Late Summer of 2008” as the first great buying opportunity of distressed properties.

http://westsideremeltdown.blogspot.com

[bubba99]

I agree with most of what you have stated as being the most logical and likely progression of housing prices. But the stickiness of prices on the way down has been very strong, and could delay price “equilibrium” for some time. Clearly the must sellers are going to be “very motivated” , but a lot of the market will hold out for years – either staying put, or turning their old house into rentals.

The worm in the apple is demand. There are at multiple people who would like to buy (almost) every house. Items 1 through 12 put limits on the effectiveness of the demand (who can or will buy at what price) but the demand is still there. There will be buyers at each price reduction, not as many as at the height of the frenzy, but buyers creating new “stable” comps.

I have two coworkers who have been waiting to buy a house for years, and now can afford something. One has just closed, and the other is looking hard to find a place “before the price goes up again”. They are both educated enough to understand the likely down trend in prices, but they choose to ignore the obvious to pursue their “dream of owning a home”. This type of thinking, along with the “prices will be back up in a few years” from potential sellers could create a real delay in prices reaching any economic value type of price point.

I knew that prices would reduce quickly after 1st quarter 2006 (when I sold my house and moved to my boat) but the robust nature of the Ca housing market fooled me. Now that I expect prices to decline slowly over the next 3 – 5 years, maybe I will be wrong – again.

[hipmatt]

You think a 2 year correction will follow a 10 year boom as you pointed out…???? Hmm… Usually corrections in RE have averaged at least 5 years… but in this record setting bubble for time and price appreciation, it will all be over in a few years.. come on guys.

I agree with your points, but this is gonna take longer than two years. If you think you will be getting an “opportunity” in summer of 08, then I wonder what kind of deal others will be getting in 2010…

After a 300-400% home price appreciation in SD and the IE in the last 10 years… you think you will be getting a deal if housing falls only 20-30%.. I don’t.

[blahblahblah]

There’s no stock market bubble when measured in inflation-adjusted dollars. It is melting down right along with housing but no one notices because they think their dollars are still the same ones they had back in 2000…

[Anonymous]

There’s no stock market bubble when measured in inflation-adjusted dollars. It is melting down right along with housing but no one notices because they think their dollars are still the same ones they had back in 2000…

QFT

It is terrifying how many people still don’t realize this. I think part of it is because we are kind of isolated in the US – we don’t really look at the world stage like people in other countries do. People need to understand what’s happening so that they can protect their money. If you’ve made 20% gain, but the dollar has lost 40% value, you might need to re-think your strategy.

[temeculaguy]

More fuel for the fire and support for your late summer 2008 forecast. The Homebuilders convention was covered by a CNBC reporter who said she has never seen a gloomier bunch at a convention except for maybe the 8-track industry convention.

http://www.paperdinero.com/BNN.aspx?id=169

At least there is no spin from the builders, their cheif economist put a guy holding a lifepreserver on the cover of it’s convention program with the words “grab on.” He admits no recovery this year, maybe next year and said priced were still too high. A stock analyst (and I’ve seen others same the same thing) said the homebuilders stock tends to recover a year before the market does so in the next three to six months he suggests buying homebuilder stock, that would put the recovery start at late 2008. Latesummer 2008, your armchair economic analysis seems to have support with the experts, you may be on to something.

One other note is that a lot of people think a decline will take years but the NAHB chief economist says it is happening very fast and he had to dramatically change his forecast that he made only a few months ago.

[latesummer2008]

Now NAHB is warning its members to hold on tight. How much bad news do people need to hear? Seems like everyday another part of the Real Estate Industry has no choice, but to deal with terrible numbers coming in. The reason May might be especially bad is, the first of the 2/28 ARMs that were given in 2005 are beginning to reset. Sticker Shock Horror stories will find there way into the MSM, therby scaring the hell out of others, who could also be @#$%&*! Also, nobody seems to detect a bottom in housing anymore and the reality of a decline is sinking in. HOMES ARE LOSING VALUE. Why would anyone buy now?
I believe this,will accelerate the downside of the current real estate cycle, likely at a much quicker rate, than the upside. People didn’t HAVE to buy on the upside, but they may HAVE to sell on the downside.
I can just imagine how much the MSM is licking its chops, right about now. T the earliest, buyers should wait until “Late Summer of 2008”, before jumping back in.

http://westsideremeltdown.blogspot.com

[kev374]

stickiness cannot be underestimated. Remember people will do what they can until they are forced to sell. They will stretch like crazy, sell stuff, beg, borrow to save their home. Most in the market are pre 2003 home buyers with good equity. These are not going to lower their prices significantly at all. You can see them reducing prices on their listings 5k at a time, yeah right, give me a break! These people love acting like their gains are a birthright.

Another culprit is ZIllow..they have such gross overestimations that it is not even funny. My Aunt’s condo in Las Vegas had a very recent comp for the price she paid for the place in 2003, yet per Zillow it’s 20% over that. Zillow seems to be ignoring comps and coming up with their own ridiculous valuations and of course some people are believing it. We all know that the Vegas market is tanking, yet the ZEstimate for this place keeps going up..up..up each month. Zillow is worthless!

[temeculaguy]

Zillow has an automated formula that uses data from past sales and gives equal value to last week’s comp and last year’s, so it cannot react quickly to changes in the market especially if they are rapid (up or down). It can’t evaluate listing prices, condition, specific location or the million little things that can change the value of R/E. It can be a useful tool for certain things but not prices (ballpark of six months ago at best), agents and appraisers are needed for specific valuations. It’s easy to graph a stock price on the internet because there are no variables and sales of exact replicas occurr every five seconds. Even used car prices can come close using computer valuations but trying to do that with R/E will never be more than a novelty.

[latesummer2008]

A 2%-3% drop per month in prices will take care of stickiness. Wouldn’t you think seriously about selling, no matter what year, you purchased ? I think MANY would. 12-18 months of declines like that would toss enormous amounts of inventory into the pool. I believe, that is the scenario we will be looking at. Not a popular view, but very possible. Remember, prices normally correct faster and deeper on the downside, than the upside, of any asset bubble. We are in UNPRECEDENTED TERRITORY now.
The MSM is already getting a hold of the foreclosure story. Tonight, CNN was chronicling an old lady losing her home after 30 years on “Debtor Nation”. Just wait until the April numbers for housing come in.

Hold on for the ride, it’s going get real interesting, real fast.

http://westsideremeltdown.blogspot.com

[temeculaguy]

I am still bearish on todays real estate prices but I have to disagree that real estate usually corrects quicker and deeper, historically it does not. Usually it lays flat or has small declines and over time inflation allows incomes to catch up. Homes are a little different than other assest classes because a certain number are needed for people to live in, we can live without shares of stock. Everyone can’t sell, some own outright and some have completely affordable fixed payments so they have no need to sell (throw in the fact that my kids don’t get mad at me when i sell a stock but moving the into an apartment and to a crappy school away from their friends as an investment decision has far more negative repercussions than selling my microsoft shares, plus the hassle of moving and the 8-10% cost of a R/E transaction make them not fluid). Finally there is a hard floor price at some point in pricing, when owning is at or near the net cost of rent (which it is not currently at) people will buy, I’ve had stocks go to zero but never R/E. What I will completey agree with is that we live in interesting times and we have defied history over the last four years, the pendulum swung right through the side of the clock so to expect the backswing to follow historical trends when the upside did not, defies logic. One thing is for certain, it will be very interesting and the media machine currently in place is far different than what we had in past cycles so get some popcorn, it may be a very good show.

[SD Realtor]

Well said temecula –

I agree that this market was fueled by extreme easy money and ran up faster then any we have ever had. However I do believe it will take a few years to unwind for reasons we have talked about… over and over again. I guess we will see…

Realtor

[Wiley]

Temeculaguy,

Have you seen the chart of the Japanese housing bust?

And their fundamentals were much better then our imho.

[Critter]

One part of Zillow that I frequently view is the Property Tax section. You can tell by the tax figure how long the house has been owned by the current owner. Also, when it states that “no sale data is available,” and this is coupled with an incredibly low tax rate, you can pretty much assume it’s either the original owner or someone pretty close to the original..

I also like the sales data section, specifically if the house has a had a lot of turnover. You can see if a series of flippers has been at work or, if the house is one of those cursed ones that people just don’t like to hold onto for more than a couple of years.

As far as the Zestimates are concerned, I routinely take 20% off the top. This is the shakiest part of their business model.

[JWM in SD]

I disagree, these are not historically comparable circumstances that we are facing right now. This is not a housing bubble…this is a globabl liquidity bubble. The housing prices were driven by easy credit, speculative demand, and fraud….period. There are several layers of that nonsense built into the current housing prices. Those layers can be stripped very easily by the msm with some scathing exposes on things such as how filipino nurses got defrauded in Temecula or any of the houses being traced on the BMIT blog or any other number of blogs. Check what happened in Irvine at Irvine Renters blog…one zip code lost over 30% relative to 2006. Another thing you are ignoring is jobs…or more specifically real estate related jobs in SoCal. A lot of those high paying bullshit jobs are going to go bye bye in the near future and many already have.

We are headed into asset deflation and credit contraction. Whether you want to admit it or not. Stop looking at the micro and start looking at the macro level…it’s not a pretty picture.

[Author]

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