SD housing market prediction?

[seniormoment]

My prediction:

Best time to buy: 01/2008 – 02/2008
Best asking price in 2008 will be discounted from current asking price: 20% to 25%

My data:

Last real estate downturn lasted about 6 years, price discount was about 30-40% from the peak, mortgage rate (30 yr fix) was about 9.25%, we just completed the first IRAQ war and economy was in bad shape, a single home price appreciated about 100% in 8-10 years at the peak.

This time is a bit different, mortgage rate is still low comparing to the last, 6.35%, economy is picking up, we are in the middle of the second IRAQ war (almost done?) but Iran may give us an extra headache, someone was saying the war is good for economy though, a single home has appreciated about 250% in 6 years so far, the FED may stop raising rate at 5.25% by the year end, so the 30 yrs fix mortgage may peak at 7% so this downturn may not be very severe and it won’t last more than 5 years from 2006, the bottom should be somewhere in late 2008, early 2009.

Care to share your prediction?

[JP]

Best time to buy: 11/2008
Best asking price: down 40%

Reason for best time: Major ARMs resets happen throughout 2007, and it will take a while for people to get their heads around their personal finances. Many will hold on through summer, because they’re hopeful. Going into winter will cause the panic.

Reason for ask: Draw a line from 1995 prices, on a log scale that corresponds to 8% appreciation. Build in overshoot.

[powayseller]

We could see a 22 year decline of 80% of prices, if we copy Japan.

Japan’s houses doubled nationwide, and tripled in the largest cities, between 1986 – 1991. Since then, prices have been falling. Prices fell 40% in the nation, and 65% in the biggest cities. Some homes declined 80%! In 2004, prices were still declining in Japan. I don’t know if they’re heading back up yet.

Also remember that extreme situations often overshoot when they correct. If housing today in SD should be 50% of today’s prices, we will overshoot and end up at 40%, or 35%, etc.

We may have many reasons why we won’t copy Japan,but the lesson is: do not think a housing bust is short-lived. It takes years to hit bottom.

Be careful to not buy in too early: check leading indicators from the MLS: DOM (true days on market, including all the expireds), inventory, and Housing Affordability Index. When the tide turns on the data, and when everyone says you should never EVER buy real estate, then take the cash you’ve saved up, and get back in.

[seniormoment]

1981, 1991, 2001 were last time that GDP growth rate experienced 2 consecutive quarters of negative growth.

We are sitting at 1.1% as of 4th quarter of 2005.

A cooling housing market will change the USA growth picture, if a new war with IRAN begins…, if a much more busy hurricane season as predicted this year…, if Delphi-GM stike occurs…, we might see gas price shoots over $6 on the West and $5 on the East, GDP may go negative again by the year end or early 2007, but because a recession ‘normally’ occurs every 10 years, the next one should be 2011-2012…

If we get negative GDP growth earlier, say 2007-2008, than should be, the SD housing market should go down
and bottom out around 2010-2011.

If we experience normal recession cycle around 2011-2012, then it will be a slow bleeding for SD housing market, a dead-cat bounce around 2009 is possible before sinking though.

What am I talking about here? Too much smoke…

[uncle_git]

I can’t see us taking the Japan path for various reasons.

We are significantly more leveraged and open to interest rate shock with the volume of adjustable rate mortgages.

Also the japanese where net savers – we’ve been net debtors for a while now – they had significant reserves to ride out any downturn in their market – most people here have little or none.

I think this bust is going to surprise most people with it’s speed and ferocity – certainly substantially faster than the previous few here in California.

I think the first 3 years will be the most brutal – no idea on when the bottom will be – but the big losses will happen in the first 3 years.

[powayseller]

It seems logical, that the loss will be slow at first, pick up some speed as ARMs reset, and then really get going as more people bail out and the psychology shifts from “RE only goes up” to “RE is a terrible and risky investment”.

Did you see Saturday’s U-T? Investor Gene Burns, featured in the House section:
“I always say: follow a Hummer and you’ll find a pre-foreclosure home.”
After making a bundle on Las Vegas real estate, investor Gene Burns has his eye on Southern California, and his reasons may not be good news for local homeowners used to riding a wave of appreciation.

“I’m planning on buying San Diego property when the market goes through the correction that will start in the summer of 2006,” he said. “I think it will crash in 2007.” “A lot of 32-year-olds bought a house for $800,000 and they just can’t afford it,” he said. “In 2007, their adjustable rate mortgages will start to adjust upward and they won’t be able to find that extra $500, $800, $1,000 a month to make the mortgage.”

Most borrowers aren’t planning ahead and they will be stunned when their mortgage payment rises, Burns said.

“I like that town by Encinitas, below Oceanside, with all the new construction,” he said. “Carlsbad – there will be lots of people who are upside down in their mortgages there. ”

He also said he had his eyes on Carlbad as the zip code to go down first.

Investor’s Next Stop: San Diego

Why does he think Carlsbad has more overextended borrowers than anywhere else?

[Jim Brubaker]

I think that most of the predictions are rather mild; I see something more along the lines of the 1929 Depression. The only loans that banks wrote back then were 5 year loans and interest only ones. After the crash, there wasn’t any need to pass legislation to restrict these loan practices; it was obvious you wouldn’t get paid back.

The big issue right now is the Fed funds rate vs. the housing interest rate. The Feds have raised rates 3 ½ points and at the same time the 30 year fixed rate has only gone up about 1 ½ points. This suggests that the Fed is a pretty small player in a global market. They are literally pushing on a string. This isn’t just a USA thing.

The second issue is the spread between long term rates and short term. Just last month the curve was still inverted the 3 year note paid more than a 30 year. This suggests that there is no fear in the bond market. To simplify what’s happening, every banker, mutual fund or what ever has “insurance” on their holding, called hedges and/or derivatives.

Somewhere along the line, fear is going to hit the bond market. Maybe it will be the collapse of Fanny Mae. A lot of Bonds will be discounted. Take a 1 million dollar bond at 6% will be discounted to 500,000 in order to sell it. The face value of the bond remains the same but you’ll notice that now the interest rate has doubled to 12%. Notice that now 5% interest is for low risk and 12% high risk.

In order to shorten the scenario lets just say in the following 3 weeks the Stock market along with all the mutual funds market tanks. The baby boomers will be walking around like they’ve just been nuked and in shock, all because of the speculative real estate market.

Now in walks a guy wanting to refi his 800,000 McMansion. The bank won’t write the loan it cannot sell the package to a third party. What he going to do now?

At this point, you would see severe dislocation of service industries, like Starbucks, nail salons, dry cleaners and restaurants. Remember 13 trillion dollars worth of hypotheticated real estate is going to have to be marked to market (maybe 3 trillion). How long will it take, is unknown. If the government steps in, probably just as long as it did in Japan. Half of all home owners won’t be affected they bought before the speculation occurred.

From here, the question of how much of a house do you want to buy? An 8 million dollar house in Beverly Hills in 1929 went for $48,000 in 1953 ( Don’t quote me on this last statement, I read it but I cannot find the source).

[Anonymous]

Does anyone think the internet will have any effect? I mean, you are all comparing against previous ups and downs and various statistics. But, 10 years ago there were not 100’s of geographic housing blogs, listing sites, or tools like zillow. With this information, it is easier and faster to tell the market is dropping, right?

[NotARocketScientist]

Yes, I do, jeremys.

As my psychology professor used to say, “The observer of an experiment becomes one of the variables which acts upon to result.” (God, I miss college.)

Anyway, we’re all going to participate an a fascinating experiment which will affect the quality of our lives for decades to come, whether we like it or not. What I find most interesting is that every scenario laid out in this thread is plausible and reasoned.

Therefore, I will not let my children read from this site before they go to bed. I have enough issues to deal with without adding night terrors to the list.

[Bugs]

Market psychology is one of the fundamentals that built this house and it will probably be a big player in it’s remodeling.

I don’t think we can overestimate the effects of the unforseeable on the market psychology. A real good oil scare or another WTC event here in the US could exacerbate any pre-existing prediliction for decline. I think it almost doesn’t matter what type of catastrophe; almost anything could act as the tipping point for a fragile market.

Excluding that… The swings of the trends seem to show the same rates of decrease on the way down as they’ve shown on the way up. I don’t think the downswing will start in earnest for another 6 months or so. Come October I think the data reported for the prior quarter’s performance is going to be the final straw. Then the declines will start to rack up in earnest and it’ll take 3+ years before they reach the historical trendline. It may not overcorrect as it has every other time in the past but I kinda doubt it.

[NotARocketScientist]

I’ll tell you, Bugs, I was looking at a computer model of how sympathetic vibrations in certain structures cause them to resonate during earthquakes and amplify the destructive force of the shaking — and I kept thinking of your post on market psychology.

We know that at some point things will get ugly in RE, that the ugliness will make it’s way into the echo chamber of the media, that people will react to the reporting, the reporting will intensify, a vicious circle of reaction and amplification will occur that carries things far beyond the original event.

Wouldn’t you kill to see a model that managed to quantify that unraveling and graph it in some visually comprehensable way?

I think it might look something like that earthquake model I saw today.

[davelj]

my guesstimate:

aggregate prices will fall 10% or so from their highs this year and another 5%-10% or so in 2007. then in 2008 and 2009 we’ll see two mid-single digit declines, such that prices will hit bottom around 2010 at about 30% below the peak. then we’ll have two years or so of stagnation – not much movement in either direction. we’ll see late-2005 prices again in ten years or thereabouts. the only reason that i don’t think prices will fall further is there’s a lot of money on the sidelines waiting for disaster, which may end up limiting the downside, which by all rights should be a 40%+ decline. also, the fed will pull out all the stops to prevent an outright disaster… as they always do. it isn’t just the american consumer that believes in “buy now, pay later.” our politicians and the fed (oh, that’s redundant) believe the same thing.

[yooklid]

The same herd mentality that drove it up will be the same one that drives it down.

[Bugs]

It might be because I’m looking for the media accounts of this, but it seems like the media has really grabbed hold of the theme and amplified it just in the last couple weeks. Not to get too “hippy” about this, but I have come to recognize that the perception contributes to the reality just as much as the reality contributes to the perception.

I love to see a statistical model forecasting such a trend. Still, I have a feeling that if such a model could be graphically displayed it would look so drastic that people would dismiss it out of hand. I mean, who takes seriously the thought of a 40ft Tsunami wiping out a coastal region located 1000 miles away until it happens?

[Author]

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