Great timing: on the heels of Tuesday's "Return to historic costs/income", Charles Hugh Smith wrote yesterday on "Two Irresistible Reasons Housing Will Retrace to 1997 Prices". His graph above shows what that decline looked like in Japan. He begins:
Two historically irresistible patterns suggest speculative-bubble housing values will eventually retrace back to their 1995-1997 levels:
- the symmetry of speculative rises and retraces
- the unbreakable links between income and housing values.
I encourage you to read his whole essay (and follow his blog, which was an inspiration to starting mine).
19 comments:
Timeout. Been lurking for several months, but need to jump in after reading this post. Before I go on a rant, I enjoy reading this site and seeing the flipping follies, overpriced $22.5m houses, etc. But in consecutive posts you have one guy saying a 14% correction and another saying 50%. I get that each post is one data point among many. But what about the big picture? What should us homeowners do...try and time the market and not have a nice tax writeoff. Haven't most of us made a lot of money since 2000 and are able to ride out the next few years. Having sold and bought in the last 6 months, I think a lot of the panic is among industry folks. Sales are way down and this is a volume business for agents, brokers, etc, and deals are much tougher to finalize than before because buyers do have the advantage. But the prices have held up reasonably well. No doubt that subprime has impacted jumbo loan rates and we will likely see prices fall some more, but where is the context of owning in this area. Aren't bk's very minimal here. Isn't the economy doing pretty well. Isn't unemployment still really really low. Didn't the stock market just hit an all time high 2 months ago. Aren't business properties still in really high demand. For this guy to use Japan's and Nasdaq's fall as precursors to going back to 1997 levels is just off based to me. There are some similar elements, but using "symmetry" to justify a fall is silly. I think war chest mentioned it a while back, but a forum here would be really interesting vs. just comments on a particular post. Thanks for your efforts on this site.
Anon above:
The case-schiller chart of los angeles in the prior post also has a sort of symmetry for the last bubble or cycle that peaked around 1990. Prices go down but are a little sticky. I don't think anyone can guess what % the prices will correct to at the bottom. My guess of the best case is that prices would gradually fall back to the 2003-2004 levels over the next 5 years. If there is a recession in the next couple years, I bet it would be more of a free fall.
The context depends on who you are. If you bought at the top and though you could refinance to get out of higher payments, you will have to walk away. If you bought at the top and lose your job in the next few years and don't have savings, you will have to walk away. If you are in the RE business or mortgage business you will probably make less or lose your job. If you have a good loan, bought early than 2003 and don't want to move, then you are fine. If you sold last year because you wanted to take your profits and rent, you'll be fine.
Anon #1,
Since you mentioned me, I will have to chime in.
I think maybe you are taking this idea of "retrace to 1997" the wrong way. It appears that you bought before 2000. Awesome...consider yourself one of the fortunate ones. If you can easily afford your payments and have a traditional loan and haven't HELOCed out a bunch of money, then you should probably just do nothing. Thats right. I said it...do nothing. Keep living a wonderful life here in Santa Monica/westside. As confident as I am that prices will come down significantly, there are many reasons to just stay put as long as you can easily afford your current situation and have the desire/ability to stay put for a long period of time (i.e. 7+ years).
Ok so now lets see what might change the situation a bit. Maybe you can afford your mortgage but it is taking up more of your income than you would like and you can't save a lot of money for an emergency fund/retirement/other investments. Maybe the mortgage is only affordable with 2 good incomes (which you currently have). What happens if your or your spouse (assuming you have one) lose a job? What happens if you get some medical issue that insurance doesn't cover (or only covers part of)? Maybe you are living in a condo or a smaller house and are hoping to buy something bigger/better in the near future. That could be jeopardized if the low end of the market falls faster than the high end.
Actually, none of this really matters too much because if you bought pre-2000, you will have so much "equity" built up that even a 50% decline in prices would probably allow you to come out on top if you were forced to sell for some unseen reason. But my point is that as you described, everything is VERY rosy right now (with the exception of recent credit market problems). Literally everything has been hitting all time highs combined with unemployment at very low levels...So when evaluating what to do (i.e. should you sell and rent for a few years hoping to buy back later for less), I like to think of the worst case situations. With investing the idea can be put, "avoid the losers and the winners will take care of themselves".
This blog is about monitoring what is unfolding around us. We don't know what is going to happen but we try to forecast likely events based on the knowledge we have now. With such a huge gain already baked into your home, I think that right now would be a great time to sell if you are shaky or uncomfortable for any reason. Yes you would have to price a bit lower, but with such a big gain it would be easy to undercut the competition and still walk away with hundreds of thousands of tax free dollars...that is MUCH better than having something come up 2 years from now which could force you to sell into a market which could be much worse.
I don't know if this helped at all but bottom line if that you should be sitting pretty as long as you have been responsible on the ride up. I think that while you could try to time the market, it makes sense to just live your life and be thankful for the position you are in. Those who didn't purchase before things got nuts are basically forced to try to time the market because of how insane prices have gotten. I think all anyone here really wants is a nice place to call home with a mortgage that still allows them to sleep at night, save for retirement, and live a nice life. Sadly (for now), it takes an income north of $400K (or so...) to buy a single family house on the westside at todays prices and still be able to live a normal life.
In the end, I think my folks are a great example. They bought here almost 25 years ago. Never took any money out or refinanced and are sitting on a huge pile of "equity". At first, I thought that as they looked towards retirement, they should sell now and take the money and run and never worry about money again. But the response they had was "where would we go, we love it here and we love our little tear down house". So if you love where you live and can easily stay the course, then I would say stay put. Wow this was long winded.
The most bullish factor I see out there is the talk of bailouts.
If you own a home and they start bailing out, you should stop paying your mortgage immediately. Duh. The biggest no brainer I've ever seen.
Good questions, Anon#1, and good responses, Anon#2 and War Chest.
I see four questions: (1) will Westside prices fall; (2) what would trigger it; (3) how much; and (4) what should a current owner do?
(1) I see prices inflated by absurd credit availability and expectations, well beyond what incomes can support, even on the desirable Westside. That's part of tracking inventory, where asking prices of a number of properties are above what anyone will pay.
(2) Going from flat to falling prices may be triggered by accumulating inventory; sellers who have to sell; restricted loans (thus our focus on Jumbos); a falling stock market (now); economic recession (likely, due to housing impacts and business cycle).
(3) How much is a good question, as we've never experienced this much run-up before. I saw "lot value" north of Montana fall by around 1/3 from 1989-94, from over $900K to below $600K. I'm interested in what other commentators suggest, as in the recent posts.
(4) There are significant costs to selling and moving, and if you don't need to, and like your current home, I probably wouldn't. But I wouldn't buy now, unless I felt a significant discount was in the price.
Every data point indicates RE is going down.
It's like the OJ trial. Every shred of evidence pointed to guilt.
But, we are all free to believe whatever we want to believe.
I think people missed this line in the first anon's post:
"Having sold and bought in the last 6 months, I think a lot of the panic is among industry folks."
Assuming anon didn't trade down, but rather traded in a $1MM house for a $2MM house, no wonder he/she is hoping like crazy that everything turns out ok.
To plagiarize Bill Clinton: Its the credit, stupid.
Without the lax or creative funding, a buyer actually must earn annually one third or one quarter of the purchase price. A $400k income gets $1.2 million in loans, and a 20% down buys a max $1.5 million house.
How many people earn $400k annually? Enough to support all the $1.5 million houses? That's California Dreaming...
Even though the prices have been sticky (supported by speculators reluctant to fold) higher priced houses in SM fall by 33% in 2 years if the economy remains robust. And then prices remain stable to slightly lower for 7 years.
Under any scenario, West Side residential real estate will not be a good investment for the near term.
I have a friend who's a lawyer married to a social worker. I find it amusing that they can't afford a house but think that the situation is sustainable. Come on, if a lawyer can't afford a house, then who the expletive deleted can?
does anyone know of a blog or source of information like this on New Mexico real estate - Santa Fe in particular? Looking at what $700k gets me in SM versus Santa Fe (which is considered an expensive market but it's a bargain by comparison), I'm thinking it's time to pick up and go.
First Federal moving main operations from Santa Monica to Playa Vista partly due to housing costs on westside...
Heimbuch continued, "The new location will make recruiting new
employees easier because of more affordable housing in the surrounding communities than is available in Santa Monica and the surrounding Westside.
"The new location will make recruiting new
employees easier because of more affordable housing in the surrounding communities than is available in Santa Monica and the surrounding Westside."
Interesting, I didn't realize there is a town called Playa Vista in North Carolina!
Very funny...I think the point is that while the Playa Vista area is obscene as well, the Santa Monica is so obscene that employees hold little to no chance of affording housing there. Hence, the outrageous traffic going eastbound out of SM in the afternoons.
Having personally lost a small fortune in the stock market in 1999 and 2000. I can tell you that markets can stay irrational for a very long time. Any seller that has had his/her property on the market for 60-90 days and hasn't received a resonable offer is nuts. They need to drop their price or sit out the credit crunch. The credit crunch could last many years.
The big problem I see and I speak to dozens of realtors a week is that sellers feel that their "equity" is real money. I always have to remind people that something is worth only what another person is willing and can pay. The ability of people to pay irrational prices for homes in bubble areas is gone for the middle class market. Remember the rich are different. Working class vs asset class. The loose financing is gone. Stated loans are on life support. Real income for middle class American's has barely kept pace with inflation. At the end of the day Wall St can create the wildest financing known to man but it has to be repaid some day. Investors don't give money away. The market for ALT A and subprime is DEAD. In addition, a knee jerk reaction has occured in large prime loans as well requiring enormous documentation and big down payments on the order of 20-25%. No stated income loans unless you are putting 20% down and have a 720 FICO. That is a generalization of course.
I am a very optimistic person by nature so negative views are seldom heard from my lips. I am sorry to say that we are in for a very long period of recession or stagflation(low growth with inflation i.e. late 70's). If you need a broader clue as to how bad our nation is currently behind the eight ball check our dollar vs major currencies and you will see what the world thinks of our prospects. Too much governement and household debt. The world's appetite for our excess is over. It's time to save and be prudent. Back to reality. The punch bowl of easy money is gone. Parties over it's time to sober up.
Anon#?, I ran across a good New Mexico housing bubble site over a year ago, but can't find it now, looking in other sites' links and Google. Let us know if you find it!
Hey all:
A couple of things. One, the bleeding has just begun. I was lucky, very, to be forced to move out of L.A because of a job and then brought back to L.A. because of a job. In the meantime, I sold and bought four properties. I became "pals" with my Countrywide loan officer. Once things started hitting the fan, I started calling him up for info. He confessed (and honestly, it was like he was asking for forgiveness) that everyday he fields at least 3 calls from people whose credit was excellent but who he had given ARMs and who had gotten HELOCS and now had no equity and no way to pay and were heading into foreclosure. This, he said, has been going on for months - so the term "subprime" isn't painting the real picture. Additionally, the idea that the rest of the American economy is so rosy may be fiction -- I have been doing research into "Buybacks" (and Warchest jump in because I'm not a stock market whiz) by so many American companies. Basically, the companies are buying back their stock so that it seems as if their earnings are higher per share. That apparently is a major factor in how earnings are judged. And American companies have been "buying back" at unprecedented rates. But if what I am seeing is true -- that companies have been BORROWING heavily to finance these buybacks -- than we are in deep doodoo. Perhaps they thought just the way homeowners have, "Heck, if the loan comes due and we aren't earning enough, we'll just resell the stock because its going up and up or we can refinance because the loans are cheap, etc."
Here's a good link before the credit crunch: http://www.forbes.com/free_forbes/2007/0604/157.html
Here's one giving an idea of how nasty it could get: http://capital-flow-analysis.com/capital-flow-watch/the-great-american-private-equity-buyback-arbitrage-play.html
There's some good data on how many billions were borrowed for buybacks but I can't find the link quickly.
Thoughts anyone?
the comparison between Japan and the stock bubble is absurd to say the least. I lived in Japan during the run up and it was more about taxes than investment. the tech bubble was more about investment bank fraud than anything else.
this RE bubble is more about easy money and people fearing putting money in the stock market. no big mysteries here.
Anon, regarding Santa Fe, NM:
I had to live there briefly while growing up. It is beautiful. My folks are still obsessed with it. They vacation there every summer and have occasionally dreamed of buying something there. We get the Santa Fe newspaper delivered.
Anyways, I just got a chance to look over the real estate section. It is absolutely massive!! Many of the same factors that drove westside real estate were/are driving Santa Fe. Many wealthy folks buy second homes there for vacation/summer. Lots get rented out. There seem to be more than ever to choose from when it comes to renting nowadays.
It is much cheaper there than the westside but I think that waiting would be prudent. Pretty surprising answer, yes I know.
DLP, buybacks all depend on the point of view. You are correct in stating that they have been funded often with funny money from the loose credit markets. But lots of times, companies with lots of excess cash on the balance sheet will buy back stock as well. It is done to reward shareholders. Yes it is a way of inflating earnings but I don't think it is bad...by definition, earnings per share go up when share count goes down. Many shareholders prefer capital gains (i.e. stock goes up due to buyback) rather than excess dividends because you get to choose when you pay the cap gains (i.e. sell).
Maybe the most questionable thing to do would be to issue debt which can be PIKed (i.e. deferred payment of interest) in order to buy back stock...haven't seen any of that recently but there has been plenty of issuance of debt to buy back stock. LOTS of companies do this and it is smart. If the debt markets want to throw out money at cheap rates, then why not take it. It is effectively shorting debt and going long equity...This is also exactly what private equity firms do...and they often make a killing. Being opportunistic in the debt markets is smart...it is sustainability which is the question.
I think that buybacks have been a big part of the recent rally. They should slow down if the debt markets make issuing debt prohibitively expensive. However, companies will always do it if they have excess cash and think it is the best use of cash. Markets are cyclical. When the debt markets loosen up again (could be months or years til this happens), then you will likely see increased buybacks.
I could go on and on here but I think I will stop. However, in the end, I don't think that because companies issued debt to fund buybacks means that the economy is somehow false and doomed. Some companies may be getting in over their heads and while buybacks do boost EPS, most companies have legitimately been doing very well up to this point and have had great top line growth while slashing expenses. These are the main components of EPS.
well, I found this blog on New Mexico real estate...seems to have some helpful information but not the spirited debate found on Westside Bubble. http://new-mexico-real-estate.blogspot.com/
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