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LA_Renter
ParticipantI did the symbols like you said, hit preview and it did not show link?
Participant1. Rent
2. Sold in 2003 in Seattle/Kirkland, relocated to So Cal for job
3. We sold before market peak but value of townhome doubled since I purchased in 93
4. Independent analysis/research on internet which led me to piggingtons, housingbubble, etc
5. We would relocate to Kirkland Wa if we could, two very good jobs here right now.ParticipantWaiting Hawk,
Thank you for that post. It’s amost eerie.
ParticipantMan, you got to see the Chili Peppers. Envy. I was at a work function last week and somebody asked a question if you could have a band play at your own party who would it be, mine the chili peppers. Hope you had a good time.
ParticipantThat is probably a concern for the FED long term. Japan is just now coming out of deflation as a result of their bubble in 80’s. Whats worse a severe recession thats over more quickly or a long drawn out downturn? As indicated in that Barron’s article it is probably best just to take all the pain now and get it over with. It wont be fun but we will probably b better off in the long term. i wouldn’t hold my breath though, this situation has some politics to it.
ParticipantOK what is it that UCLA Anderson is trying to say? Talk about mixed messages. So they are saying there is no way this could be a soft landing but it won’t lead to a recession and home price won’t fall. But it will be bad.
Despite talk of a soft landing, a number of economists are warning that the economy could suffer a severe slowdown, if not a recession, or that inflation could reach higher levels.
Ed Leamer, director of the UCLA Anderson Forecast, doesn’t expect a recession to develop over the next year, but tells USA Today “this soft-landing scenario is a fantasy.”
He predicts that the housing slowdown will be much more severe than the Fed is saying. As a result, consumer spending, jobs, and overall growth could suffer, he says. “Anything housing-related is going to feel like a recession, almost like a depression,” says Leamer.“Energy prices matter, but they don’t play the kind of role that housing is going to play,” says UCLA’s Leamer. “The Fed can do very little now. … It made a major error by letting this housing sector get out of control.”
ParticipantAlright here is my take from a body language perspective. Number 1, I did not see any steamroller, Rich held up well. Number 2, Lee Sterling is a professional realtor (sales guy), this guy is doing what he gets paid to do – Sell. Professional sales is my chosen profession so I guess I can say, it takes one to know one. Rich is coming from a fiancial/economist background that deals with actual numbers and analysis that translates well on a forum such as this blog. I guess I would say that Lee had a better command of his presentation but come on the guy is a professional realtor. There was nothing that Lee said that remotely changed my view on the current state of California RE but I have also done my due diligence. My suggestion to Rich is to keep in mind that you are persuading viewers to look at the current RE differently than what is being touted by the RE industry and much of the media. All Rich needs to do is raise reasonable doubt which I think he did a reasonable job on this show.
ParticipantThis is a Barron’s article by LON WITTER. This is a subscription so I will list the entire article here. I wanted to put it on this thread due to Thornberg’s (whom I respect) reluctance to approach this subject.
The No-Money-Down Disaster
By LON WITTER
A HOUSING CRISIS APPROACHES: According to the Commerce Department’s estimates, the national median price of new homes has dropped almost 3% since January. New-home inventories hit a record in April and are only slightly off those all-time highs. Existing-home inventories are 39% higher than they were just one year ago. Meanwhile, sales are down more than 10%.
Although the stocks of new-home builders are down substantially, the stock market and many analysts are ignoring other implications of the housing news. In the latest Barron’s Big Money Poll of institutional investors, not a single money manager ranked problems in the housing market among the factors likely to lead to a sharp selloff in stocks in the next 12 months (see “Headed for Dow 12,000,” May 1, 2006). Most experts still predict a 2%-6% rise in housing prices for the year.
These experts and analysts are basing their predictions on a possible increase in wages, inflation and GDP growth. They are overlooking the fact that by any rational valuation there has been no support for the run-up in housing prices since 2001, when the wealth of the middle class was battered by a bear market. Since then, inflation has been low, and wages practically stagnant. Housing prices, on the other hand, are through the roof.
Extrapolating housing prices from their current level based on wages and inflation is like saying a $100 Internet stock with no cash flow and negative earnings will rise as long as it is able to narrow the loss. The analysis ignores the fact that the stock never should have been trading at $100 in the first place.
By any traditional valuation, housing prices at the end of 2005 were 30% to 50% too high. Others have pointed this out, but few have had the nerve to state the obvious: Even if wages and GDP grow, the national median price of housing will probably fall by close to 30% in the next three years. That’s simple reversion to the mean.
A careful look at the reasons for the rise in housing will give a good indication of the impact this drop will have on the stock market. They include, in chronological order: The collapse of the Internet bubble, which chased hot money out of the stock market; rock-bottom interest rates; 50 years of economic history that suggested housing never goes down, and creative financing.
The first three factors might not be enough to cause a crash, except that together they led to the fourth factor. Irresponsible financing causes bubbles. It causes individuals to buy houses they can’t afford. It causes speculation to run wild by lowering the bar to entry. Finally, it leads individuals who bought houses years ago at reasonable prices into the speculative borrowing trap. The home-equity credit line has supported American consumer spending, but at a steep price: Families that tapped into their home equity with creative loans are now in the same trap as those who bought homes they couldn’t afford at the top of the market.
The cost and risk of adjustable-rate financing can be devastating. Consider a typical $250,000 three-year adjustable-rate mortgage with a 2% rate-hike cap. If the monthly payment now is $1,123, after the first adjustment, the monthly payment is $1,419. After the second adjustment, the monthly payment is $1,748, a $625-per-month increase. That’s $7,500 more per year just to maintain the same mortgage. If you think high gas prices are biting the consumer, consider the cost of mortgage adjustments.
Some more numbers:
• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000
• 43% of first-time home buyers in 2005 put no money down
• 15.2% of 2005 buyers owe at least 10% more than their home is worth
• 10% of all home owners with mortgages have no equity in their homes
• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.
These numbers sound preposterous, but the reasoning behind them is worse. Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.
Now the house is the bank’s collateral for the questionable loan. But what happens if the value of the house starts to drop?
The answer, at least from banks, is already clear: Float the loans. The following figures are from Washington Mutual’s annual report: At the end of 2003, 1% of WaMu’s option ARMS were in negative amortization (payments were not covering interest charges, so the shortfall was added to principal). At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.
Every month, these borrowers’ debt increases; most of them probably don’t know it. There is no strict disclosure requirement for negative amortization.
This financial system cannot work; houses are not credit cards. But WaMu’s situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million.
Negative amortization and other short-term loans on long-term assets don’t work because eventually too many borrowers are unable to pay the loans down — or unwilling to keep paying for an asset that has declined in value relative to their outstanding balance. Even a relatively brief period of rising mortgage payments, rising debt and falling home values will collapse the system. And when the housing-finance system goes, the rest of the economy will go with it.
By the release of the August housing numbers, it should become clear that the housing market is beginning a significant decline. When this realization hits home, investors will finally have to confront the fact that they are gambling on people who took out no-money-down, interest-only, adjustable-rate mortgages at the top of the market and the financial institutions that made those loans. The stock market should then begin a 25%-30% decline. If the market ignores the warning signs until fall, the decline could occur in a single week.
There are other possibilities: The housing market could strengthen; consumers could shrug off higher loan payments and declining housing values; the financial system may have anticipated a collateral disaster (though with banks holding a record 43% of total assets in direct mortgage loans that seems unlikely); the rest of the world could carry the United States for a change. But these are difficult bets to place. Anyone holding stocks, futures or stock-index funds in this environment is taking a tremendous risk.
What happens after the decline depends on our financial policies. When Japan went through a similar situation in the early 1990s, the right advice was clear: Bite the bullet and get the bad loans off the books. Eventually the Japanese acted, but it took them 15 years of trying everything else first.
If we have the courage to take the right medicine right away, the effect of a market collapse could be very sharp and painful, but relatively short-lived. If, like Japan, we fail to act, the coming decade could be very bleak indeed.
ParticipantWell it didn’t during the last downturn starting in 01. The Pacific NW got hit pretty hard in comparison to the rest of the country. The Nasdaq crashed wiping out the dotcoms and technology, then that was followed by 9/11 and a big aerospace downturn. The impact on RE was muted due the FED taking interest rates to 1% but property sales south of the 90 where many Boeing employees lived went pretty soft, keep in mind they did not have bubble pricing to begin with.
Also there was a big aerospace downturn in 93 and 94 that took home values down about 10%. I bought a townhome in Kirkland Wash in 93 about 10% below my next door neighbors place (same unit, same view) that they purchased in 91. Kirkland is right next to Microsoft but Boeing layoffs still impacted the area.
Participanthere is the link to the LA Times article
http://www.latimes.com/business/la-081806boeing,0,4672358.story?coll=la-home-headlines
ParticipantWell, there goes the housing can only go down when there is a downturn in employment argument. I lived in Seattle for over a decade and I remember what these types of layoffs do to the local economy.
“This week, Gov. Arnold Schwarzenegger wrote to President Bush asking that funding for more C-17s be included in the federal budget. The governor wrote that the program “has a multibillion-dollar impact on the local economy”
yep
This is on top of the Nissan move this year. Nissan also pulled many high level marketing jobs out of the area, I know several people that are moving to Nashville because Nissan was their key account. Rumor has it that the other Asian car makers may follow suit for the same reasons Nissan left. If we are to experience a recession then IMO southern California will be ground zero of that recession. You have a rapidly contracting RE market combined with the loss of high paying Aerospace jobs plus companies like Nissan leaving the area. Those are just the headline companies, how many small businesses are leaving that you don’t hear about. Combine that with the fact that recruiters can no longer entice people to move to California…….talk about some disturbing under currents in this economy. Time will tell.
Participantpoway,
That is a good point, I was thinking more in reference to the liquidity of actual prices. Developers and distressed properties will HAVE to sell for what the market bears. The market hasn’t totally disappeared. The greater the supply of “HAVE to sell” properties the greater pressure there is to lower price. If the majority of sales transactions taking place are dominated by desperate developers and distressed property owners then they have to compete for the limited number of buyers, thats when you could see median and avg prices plummet. The point I was making is that IMO we will have a far greater number of distressed property owners than in the past due to the disintegration of lending standards.
Participantduplication
ParticipantThe issue of liquidity is the primary discussion here. How liquid can RE be? The argument that this downturn will be long and slow is a good one due to the traditional illiquid nature of RE. The most liquid aspect of RE are the developers, they can dump and may have to dump inventory to keep a positive cash flow. The greatest percentage price declines will be set by the developers. That will be in line with the previous downturn IMO. Now the big difference in this downturn that I see and that has been discussed on this thread is the role of exotic loans. This is where we are in uncharted and untested waters. You are probably looking at the most leveraged housing market in history. As the mania ensued people were buying homes (especially 2004 and 2005) that were 7X to 12X income using exotic loans. The fast appericiation of the home would make the two ends meet when the loan reset. Well it was supposed to work that way. When the two ends don’t meet people have to sell or face foreclosure and many will face foreclosure. This dynamic increases the liquidity of RE making steeper and faster price declines possible. IMO we are looking at one of the most liquid RE markets we have ever seen due to credit standards basically evaporating. The good thing is we don’t have to wait too long to determine how severe this aspect will be, the majortiy of ARMS are resetting starting about now and peaking in 07 and 08.
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