Will we see a selling panic in housing?

[DaisyDuke]

My 2 Cents on the 20 percent . . .

I recently read a great article about the last housing downturn and how long it took for prices to drop. In the last downturn it was 18 months. The article was basically a news article time capsule. It reported that Bel Air dropped 40 to 50% in 18 months.

IMHO, with widespread information (the internet!) it may drop faster than 18 months.

But we shall see.

DD

[DaisyDuke]

My 2 Cents on the 20 percent . . .

I recently read a great article about the last housing downturn and how long it took for prices to drop. In the last downturn it was 18 months. The article was basically a news article time capsule. It reported that Bel Air dropped 40 to 50% in 18 months.

IMHO, with widespread information (the internet!) it may drop faster than 18 months.

But we shall see.

DD

[temeculaguy]

GN you are right, it usually overshoots and fear will play a role especially in my area where gas prices, traffic, distance to job centers, recent building (town doubled during the bubble), few established owners without a mortgage and the Murietta scandal/foreclosures are all serving to accelerate the local fear. The situation here is easily six months to a year ahead of San Diego.

But Rustico’s assertions about my strategy are spot on accurate probably because we have had discussions in the past about it. I am not trying to time the bottom, this is not my profession nor do I purport to be an expert. My strategy of waiting until rent/purchase ratios were inline as well as being inline with my own financial goals then it would be my time. It’s a simple way of approaching a complex market. A market that has often baffled experts and one that has way too many variables in it. My strategy has worked so far, I bowed out of the market in early 2006 and have been watching it fall without me. That was easy, the next part is hard. It is now where I wanted and expected it to be. If your chosen place had already fallen 20-25% you’d be in the same pickle. Do I decide on a target price or a target time. Does it matter if S.D. or O.C. hasn’t fallen yet? I will give it until the winter and re-evaluate but once the place you want hits the price you can comfortably afford the real confusion sets in.

Since this post just hit the official length of a diatribe, I’ll close with a Lao Tzu quote “There is nothing better than to know you don’t know”

[temeculaguy]

GN you are right, it usually overshoots and fear will play a role especially in my area where gas prices, traffic, distance to job centers, recent building (town doubled during the bubble), few established owners without a mortgage and the Murietta scandal/foreclosures are all serving to accelerate the local fear. The situation here is easily six months to a year ahead of San Diego.

But Rustico’s assertions about my strategy are spot on accurate probably because we have had discussions in the past about it. I am not trying to time the bottom, this is not my profession nor do I purport to be an expert. My strategy of waiting until rent/purchase ratios were inline as well as being inline with my own financial goals then it would be my time. It’s a simple way of approaching a complex market. A market that has often baffled experts and one that has way too many variables in it. My strategy has worked so far, I bowed out of the market in early 2006 and have been watching it fall without me. That was easy, the next part is hard. It is now where I wanted and expected it to be. If your chosen place had already fallen 20-25% you’d be in the same pickle. Do I decide on a target price or a target time. Does it matter if S.D. or O.C. hasn’t fallen yet? I will give it until the winter and re-evaluate but once the place you want hits the price you can comfortably afford the real confusion sets in.

Since this post just hit the official length of a diatribe, I’ll close with a Lao Tzu quote “There is nothing better than to know you don’t know”

[Anonymous]

Here’s the other factor that I rarely see brought up on this board, which I think is another huge chink in the armor: the retail economy in Southern California. Consumer spending has driven the entire US economy for the past 10 years, making up approximately 70% of GDP. Most of that spending has been fueled by home equity loans, particulary in the bubble markets of the country. This is really evident in SoCal. All one need do to see the evidence of this is take a look around on the freeways and see the number of Bimmers, Lexus’, Mercedes, and other luxury vehicles on the road here compared to non-bubble markets of the US, then compare the median incomes of those same areas. Case in point, my main residence and business is in Des Moines, where the median income is $45k and the median home value is $175k. San Diego has approximately the same median income but the median home value is $500k. Obviously a huge disconnect exists. Now, as it relates to consumer spending, the paper home equity runup that has fueled huge consumer spending in SoCal is now exhausted and, in fact, is backsliding, which means retail spending shuts down just like the residential construction game has. In San Diego the percent of GDP made up by consumer spending was probably somewhat less than the 70% level nationally due to the inordinate contribution of homebuilding to the local GDP, but it’s still very significant. The next shoe to drop then comes in commercial real estate, particularly retail because the health of retail tenants will deteriorate rapidly. At that point, the whole thing can unravel pretty quickly and move from the bottom up. When Joe America stops spending money, which he has, even the CEOs with the places west of the 5 are going to get stretched.

I really see the perfect storm on the horizon here. Anyway, that’s what I’m waitin’ for.

[Anonymous]

Here’s the other factor that I rarely see brought up on this board, which I think is another huge chink in the armor: the retail economy in Southern California. Consumer spending has driven the entire US economy for the past 10 years, making up approximately 70% of GDP. Most of that spending has been fueled by home equity loans, particulary in the bubble markets of the country. This is really evident in SoCal. All one need do to see the evidence of this is take a look around on the freeways and see the number of Bimmers, Lexus’, Mercedes, and other luxury vehicles on the road here compared to non-bubble markets of the US, then compare the median incomes of those same areas. Case in point, my main residence and business is in Des Moines, where the median income is $45k and the median home value is $175k. San Diego has approximately the same median income but the median home value is $500k. Obviously a huge disconnect exists. Now, as it relates to consumer spending, the paper home equity runup that has fueled huge consumer spending in SoCal is now exhausted and, in fact, is backsliding, which means retail spending shuts down just like the residential construction game has. In San Diego the percent of GDP made up by consumer spending was probably somewhat less than the 70% level nationally due to the inordinate contribution of homebuilding to the local GDP, but it’s still very significant. The next shoe to drop then comes in commercial real estate, particularly retail because the health of retail tenants will deteriorate rapidly. At that point, the whole thing can unravel pretty quickly and move from the bottom up. When Joe America stops spending money, which he has, even the CEOs with the places west of the 5 are going to get stretched.

I really see the perfect storm on the horizon here. Anyway, that’s what I’m waitin’ for.

[HereWeGo]

Well folks, now that the secondary market has shut down, if there’s no help from the Fed, housing demand, especially in the most bubbled locales, will plummet. Some areas will still be desired, but the areas described by SD Realtor will be in for a world of hurt.

Plummeting demand + oversupply (builders + end-of-the-rope debtors) eventually = panic.

Now if the Fed acts and debtors can refinance, there’s still falling demand (due to price momentum and the end of option ARMs) and an oversupply, but the decline will be much softer, and, of more importance, the credit markets will calm down.

But if the Fed fails to act … wow. I hope you, all of your friends, and all of your loved ones are either in cash (or better yet, Treasuries) or short the lenders/homebuilders/financials.

[HereWeGo]

Well folks, now that the secondary market has shut down, if there’s no help from the Fed, housing demand, especially in the most bubbled locales, will plummet. Some areas will still be desired, but the areas described by SD Realtor will be in for a world of hurt.

Plummeting demand + oversupply (builders + end-of-the-rope debtors) eventually = panic.

Now if the Fed acts and debtors can refinance, there’s still falling demand (due to price momentum and the end of option ARMs) and an oversupply, but the decline will be much softer, and, of more importance, the credit markets will calm down.

But if the Fed fails to act … wow. I hope you, all of your friends, and all of your loved ones are either in cash (or better yet, Treasuries) or short the lenders/homebuilders/financials.

[SD Realtor]

At this point I do agree with you HereWeGo. I think this secondary market will accelerate the depreciation cycle in the already hurting areas. How it affects the more desireable areas will be interesting… Suffice it to say it cannot help them. I think more of the phenomenah of what sdr pointed out will grow. That the more desireable areas will be dominated by less desireable properties. We will see…

SD Realtor

[SD Realtor]

At this point I do agree with you HereWeGo. I think this secondary market will accelerate the depreciation cycle in the already hurting areas. How it affects the more desireable areas will be interesting… Suffice it to say it cannot help them. I think more of the phenomenah of what sdr pointed out will grow. That the more desireable areas will be dominated by less desireable properties. We will see…

SD Realtor

[temeculaguy]

We will find out on Tuesday, but don’t hold your breath, the odds of a 1/4 drop did increase from 7.5% chance to 12.5% chance on Friday. I’ve seen news reports of a 25% chance but if you want to place a wager on the fed funds futures it stands today at a 1 in 8 chance of a cut on Tuesday.

http://www.cbot.com/cbot/pub/cont_detail/0,3206,1563+23425,00.html

IMHO Bernanke and company are going to stand pat for the rest of the year and let things play out, econ 101, Laissez Faire. I’ve read extensively about Ben and I must say that I think the Cramer’s of the world should do more homework before accusing him of not caring about people losing their homes. He is very interested in the cause of the great depression and believes the fed could have turned it into a correction rather than a crash. I just read a piece he wrote in 2000 and he seems to believe that corrections are good, unsustainable growth or price appreciation is bad and he sees the role of the fed to step in to shorten disaster, not avert it. A perfect analogy would be that he sees the fed as an paramedic and not a seatbelt. Go too fast and you will get hurt, you should get hurt, we will just keep you from dying, treating your injuries, not preventing them.

[temeculaguy]

We will find out on Tuesday, but don’t hold your breath, the odds of a 1/4 drop did increase from 7.5% chance to 12.5% chance on Friday. I’ve seen news reports of a 25% chance but if you want to place a wager on the fed funds futures it stands today at a 1 in 8 chance of a cut on Tuesday.

http://www.cbot.com/cbot/pub/cont_detail/0,3206,1563+23425,00.html

IMHO Bernanke and company are going to stand pat for the rest of the year and let things play out, econ 101, Laissez Faire. I’ve read extensively about Ben and I must say that I think the Cramer’s of the world should do more homework before accusing him of not caring about people losing their homes. He is very interested in the cause of the great depression and believes the fed could have turned it into a correction rather than a crash. I just read a piece he wrote in 2000 and he seems to believe that corrections are good, unsustainable growth or price appreciation is bad and he sees the role of the fed to step in to shorten disaster, not avert it. A perfect analogy would be that he sees the fed as an paramedic and not a seatbelt. Go too fast and you will get hurt, you should get hurt, we will just keep you from dying, treating your injuries, not preventing them.

[HereWeGo]

It’s going to take much more than a quarter point cut. As I mentioned before, I could live with a bifurcated rate, where the low rate is exclusively to allow refinancing and the 1/4 pt higher rate is to fight off inflation concerns.

I’ve read many of Bernanke’s writings, he knows a great deal about the Japanese collapse and has mentioned that he has “a printing press.” I’m not sure the printing press needs to be revved up for the greater economy, but if the trend is towards millions of foreclosures over the next 6 months, that trend must be stopped and it must be stopped now. Otherwise the fixed income crisis will continue to spiral out of control.

Let me put this a different way: “subprime” has metastasized. It is the polar opposite of “contained.” There’s no way to treat the bond market convulsions without first dealing with the source of the disease … namely, that US debtors are walking away from their obligations.

[HereWeGo]

It’s going to take much more than a quarter point cut. As I mentioned before, I could live with a bifurcated rate, where the low rate is exclusively to allow refinancing and the 1/4 pt higher rate is to fight off inflation concerns.

I’ve read many of Bernanke’s writings, he knows a great deal about the Japanese collapse and has mentioned that he has “a printing press.” I’m not sure the printing press needs to be revved up for the greater economy, but if the trend is towards millions of foreclosures over the next 6 months, that trend must be stopped and it must be stopped now. Otherwise the fixed income crisis will continue to spiral out of control.

Let me put this a different way: “subprime” has metastasized. It is the polar opposite of “contained.” There’s no way to treat the bond market convulsions without first dealing with the source of the disease … namely, that US debtors are walking away from their obligations.

[DaisyDuke]

You got it Temeculaguy.

Bernanke inherited this problem and, IMHO, is addressing it in the most logical way possible for the US directly and globally.

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