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powayseller
Participantequalizer, did you read my post the other day about the 2 reasons that prevent someone from refinancing today? Many people cannot refinance. I don’t want to repeat the entire post, maybe Search will find it for you. I read an article in USA Today about a lady squeezed out by adjusting ARM payments, and it said she could not refinance for 2 more years, and I didn’t understand why. So I asked my neighbor, a loan officer, and she explained it to me.
Daniel, I think I remember it now. Cagan’s assumptions are based on prices not falling? Prices have already fallen, as others on this forum have reported. Realtors are telling me of big falls, and many houses back at 2004 prices. Did Cagan talk about the effect of foreclosures, and the 2 scenarious under which someone cannot refinance?
ParticipantReal Estate Return for Largest Pension Funds
Real estate seems like the “in” investment for pension funds. Will these porfolio managers get out at the top, or ride the wave down? What will that do to their returns?
ParticipantIn a study of market bubbles, Charles Kindleberger and the International Monetary Fund found that every asset reverted to its mean. At the time, the people refused to believe it. Like you, they said it was different this time. Demand for tulips, railroad stocks, tech stocks, housing would be too high.
As you know, Rich’s charts so clearly show that the last two San Diego housing cycles reverted to a price/income ratio of 7. Unfortunately, we don’t have data for the cycles before the last two. In regard to the ratio of 7, edna_mode made an interesting post, speculating that we could rise to a new permanently higher plateau, to a higher ratio. I debunked that theory in my post Can this Bubble Correct at a new higher plateau? . That post definitively explains why every asset bubble in history that we have a record of, has reverted to its mean.
sduuude, you say that as prices drop, demand goes up. But this is clearly *not* happening. Prices are down 10% or more, but demand keeps falling.
Yesterday I copied iTulip’s Eric Jantzen, where he explained why demand actually falls as prices drop. Likewise, as prices rose, demand rose furiously. People want more of the bubble asset when the price rises, less when it falls. So you see, the lower the demand, the lower the prices, and the lower the prices, the lower the demand, and we get into this vicious feedback loop. At some point, in 5 – 7 years, prices will be so low, that bargain hunters will come in and start buying. The median will drop for another 2 years, but those of us in the know, will be out buying at that time, at the very bottom.
sduuude, I ask you to take the challenge Grantham gave to his 2400 investors in the audience (see the link of my post), when he asked them to name just one, *one* asset bubble that did not revert to the mean. The scholars who study this for a living have *never* found one. It amazes me that people still think this is different.
ParticipantFormerOwner, very interesting story about your ancestors. So it sounds like we could all manage just fine in a depression. What did your family do for work? This is the area of concern – how will people derive income?
PD – I asked this question many times, and nobody ever answered it. I remember that U-Haul made more money during recessions, so I checked the public owned storage and moving facilites, and they all have PEs of 28-33. Same for PEs of pawn shops. Other ideas: Gillette, Proctor and Gamble, vice (cigarette, alcohol, gambling, sex – magazines, movies).
Looking back at the 2000-2001 recession is not helpful, because consumers were spending heavily. My neighbors at the time owned an RV dealership, and their business skyrocketed after 9/11. People were flush with cash, interest rates were low, and Americans were more interested in travelling the US in an RV, than flying to Europe. This recession will be consumer-led, so there won’t be that surge in RV sales.
I just try to think about my own life. What would I cut back on if my income were cut in half. Think about people with less money, and what they would do – I read switches from Ralph’s to Costco, Nordstrom to Kohll’s, McDonald’s to eating at home. I wonder if *any* business will do better, only some will be hurt less. I checked into some of the companies I consider recession proof, and the PE ratios are too high. Pawn shops will do really well. People will start selling their luxury cars, jewelry, RVs, boats, motorcycles, dirt bikes, and more. But who will buy it from them?
Sometimes the best think you can do with your money is protect your principal. This is such a time. I put a little money into Chevron based on Zeal’s advice, and want to diversify into other currencies, but I am 95% cash. This is my plan in riding out the recession, just to hold on to what I’ve got.
ParticipantSo your mortgage is less than $2K/month? That is very lucky. I have 3 kids and a dog and a cat, and I rent a townhouse. I love it! We pay $2200/month, and just signed a 2 year lease.
Interesting about the 5% drop. We had the same situation, and my husband and I still argue about our sales price. We listed our house last October for $780-830, but fully expected tot get $830. After 2 weeks on the market, last November, we had an offer at $780K. We countered, and the buyers walked. A month later, another offer at $780K. I told my husband, “we need to take this”. He said, “No, I’m not giving away my house.” We argued about this (a lot, actually, because I had been reading about the housing bubble and was afraid our offers would keep getting worse, and he was so in love with the house and thought the right buyer would fall in love with it and pay $800K).
We countered at 800K, even though the offer came with a cover letter that said the $780K was a firm and final offer. The buyer’s agent said they would not consider a counter, so we better remove that or they would walk. We buckled, and removed the counter, and sold for $780K. My husband thinks we should have held out for $800K. He thinks that someone would have paid that much. I don’t think so, since we were selling in a declining market. The other 3 homes that were our competition are either expired, cancelled, or reduced. We are the last sale in 8 months in that area.
But to keep marital peace, I told my husband that it is *possible* that we could have got the $800K. But I don’t believe it at all! It is more likely that our next offer would be $760 or $740, or that we would have reduced our price like the other sellers. I was feeling like that house, as beautiful as it was, was an albatross, because it was on its way to losing half its value. That’s what I think – most houses here will lose half their value, so I just wanted to dump and run before it got worse. I feel so much freedom now without that house.
Participantdontfollowtheherd – what types of jobs are these realtors and brokers doing now? Is the pay about the same? Do you know if any of them left San Diego?
solman, would it be worthwhile to rent for a year and then make the move to CV? My neighbor backed out of her new house in Temecula, because after 8 months she couldn’t sell her house for the price she needed to make the move.
It sounds like buyer psychology has seriously shifted. You are the 6th cheapest house in the area, and no buyers for 2 months? How much lower would you have to price it to get someone through the door? I read from Jim Klinge’s website if you have no buyers coming to look, you are at least 10% overpriced. If you have buyers and no offers, 5-10% overpriced. If you get offers, you are just about right.
ParticipantRoubini said this recession is in the pipeline, even if the Fed pauses or even eases this month. If you look at GDP growth right before the last recession, we are copying those same numbers so far. This time we have rising inflation, and last time we didn’t. Once upon a time, we Americans could grit and bear a recession just like we handled a good workout: you drip with sweat and you want to stop but you go on and on and use your hardest willpower despite the pain… that’s what we need now economically. We’ve become too pampered, living off other people’s work, sending out IOUs while the “slaves” build us goods. We Americans need to get back to the ethics of our founding fathers and pioneers, who knew how to go without things and work hard. That’s the spirit that will make this country great again.
ParticipantWell, you may be right, but there is no way of knowing how long the government’s might and our Fed can keep the chararde going. Who would have thought the tech bust would be averted by another liquidity bubble? Who knows how long this bubble will take to pop, and what will be waiting at the other side? Perhaps a depression, perhaps a big recession, maybe we Americans will once again produce more than we consume and turn this country around? Any of these are equally likely to me. I am not prepared for a depression. What do you have to do to get ready for one? Don’t you have to grow your own food? I hate gardening.
ParticipantDaniel, I read a number of Cagan’s reports, and found his earlier work quite good, his later work full of flaws, as he makes one serious omission: he ignored CLTV and erroneously lists LTV as CLTV. Let me explain: Fannie Mae and other agencies do *not* keep track of the piggyback loans. If you get an 80/20, they record the 80% part, for a LTV (loan to value) of 80%. So a 100% CLTV (combined loan to value) loan is recorded as an 80% LTV. Cagan does this in one of his entire reports. Since you have already read this report, perhaps you could answer if he takes CLTV into account properly.
The Mortgage Bankers Ass’n and Fannie Mae have publicly acknowledged these loans are a concern, and they don’t know how widespread the problem will be. I bet they could find out if they really wanted to, but why should they? They’ll just say enough to CYA, so they can say later they warned people about this coming down the pike. It’s not a coincidence or conspiracy that the media is jumping on these stories. The exotic loans are a true concern..
Participantsuuuude, 3) The date from which you start the 1% growth is important, and can affect the analysis significantly. How did you come up with it? 2003 seems random.
I don’t know where you got 1%. I am extrapolating wage growth at 3% annually, which is higher than it actually was historically. Schiller’s research shows the national housing prices increase 1% real annually, and this was used by Charles Smith, not by me. I used Rich’s prices-to-income ratio.This thread is about reversion to the mean. The demand argument is all part of it. When bubbles are on their way up, demand is heightened, as buyers are in a frenzy to get in before they are priced out. In a decline, demand works the other way. Buyers start to stay home, so to speak, as they see prices fall and don’t want to buy today, believing that prices could be lower tomorrow. For this reason, although prices are LESS now than last year, the number of buyers KEEPS DROPPING. Why isn’t demand up, since prices have come down so much? So the entire reversion to the mean plays out because psychology shifts on the way down too.
sduuude wrote In fact, if you look at all the sales recorded in 2004 and 2005, you start to realize that for every suicide loan, there is someone with a small truckload of cash – each of whom is a potential buyer in the coming down cycle, even if interest rates are high. I don’t see that at all. How did you get this conclusion?
As to your last comment, many people who sell are leaving San Diego,as I keep writing about. We had 44,000 people moving out in the year ended June 30, 2005. I haven’t seen the data this year, but going by anecdotes from a half dozen friends/acquaintances, it is a lot more. I never heard of people leaving, and these last few months, so many people ar telling me that so-and-so left San Diego for a cheaper city. We have 30% of our listings vacant. So sales are down because the people who sold their homes left San Diego and are not buying anothe home. Some stay and rent, driving up rental demand.
Good questions, keep ’em coming.
ParticipantYes, post whatever you can remember. Do you think there is any significance in Bernanke admitting the problems in entitlements and account & trade deficits need to be addressed?
I thought his comments that “inflation will be contained in a couple years” was the most important thing that slipped out of his mouth. If I were a reporter, I would have made *that* statement the headline. He’s telling us that it is not contained now, nor will it be in the near future. How in the world people think he will stop raising interest rates is beyond me – does he really just want to fool us into thinking he cares about inflation? Do people who expect a pause know something I don’t?
When I listened to Bernanke’s testimony, I came away convinced he really cares about containing inflation *expectations*, and as of now, that is not contained, so he must keep raising rates. Am I too gullible?
ParticipantThis link is to the main Bloomberg audio/video site. Today it is the top story, but if it is no longer available when you come here, search for the title “Roubini of New York University Predicts a U.S. Recession “. It’s a 14 minute audio.
ParticipantThanks, Michael. It’s refreshing to hear from people who also research and understand the gravity of this situation, like you, bugs, privatebanker, and others. I get tired of having to explain this stuff to people who just want to argue. I am appreciative and interested when forum members take the time, as I do and you did here, to research and present their findings and analysis. I will read it as my bedtime story. Thanks again.
ParticipantIn the last few years, we sold 40,000 homes annually. Let’s average this to 50% ARMs per year(some years were 50%, while later years were 80%). This gives us 20,000 homes per year financed by ARMs. How many of the 1.1 million SD homeowners refinanced out their equity with ARMs? Maybe 20%? 10%? 5%? I found 3 in Poway who bought in the 1980’s and got these loans to liberate equity. Let’s say 1%, just to be ultra conservative.
In the last 3 years, we had 93,000 ARMs.
3 * (20K + 1% of 1.1 mil) = 3 * (31,000) = 93,000Let’s assume that 10% of these people are under the age of 25, and upwardly mobile in their careers. I think this is generous, because a study showed that half of 900 people surveyed on an exotic loan study this year lied about their incomes by over 60%. The study compared the loan application income to IRS records.
Half of the 93,000 lied about their income and exaggerated it by at least 60%. So 46,500 people exaggerated their incomes and can’t even afford those loans at current interest rates.
10% can afford it now, and after the reset period, because they are upwardly mobile. That leaves 90% of 93,000 who will not get significant raises. So 83,700 people with ARMs that they can’t afford. This is the most conservative estimate I am willing to make. It doesn’t even include HELOCs, assumes only 1% of SD homeowners refinanced during the housing boom, and gives a 3 yr average of 50% exotic loans (I think if you add I/O and stated income and HELOCs the number of people in over their heads is much higher).
83,700 people with ARMs, in over their heads, who probably can’t make their new payments in the next 3 years.
This is almost *triple* the current level of sales.
What would happen when inventory skyrockets as these homeowners and banks put those properties on the market? If 1/3 of these people sell their homes every year, we would be adding 27,900 homes to inventory every year, doubling the inventory.
If sales keep decreasing by 10 points per quarter, we will sell at most 20K homes next year. Today our inventory and sales level is 8 homes/buyer. What will happen when we have 32 homes/buyer, and those homes are listed by people in default or REO departments of banks?
What if my estimate was too conservative, and we have 60 homes/buyer?
How will the buyer fear and psychology shift into high gear, and people will flee housing purchases with the same frenzy that they used on the way up?
Some people talk about the last bubble. We didn’t have all these exotic loans. Just replace the # of people laid off from defense jobs in the last bust with the # of people with ARMs. How will the change in underwriting guidelines be different this time? Any similarities, or is it an order of magnitude worse this time? Does anyone know?
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