Friday, March 28, 2008

This time, it really is different.

Each time I hear that statement about a financial market (including real estate), I cringe. As the real estate market went up, the pundits all had reasons why "this time it was different" and we were not in a real estate bubble. We heard it during the dot.com bubble. I am guessing folks heard it during the Dutch tulip mania, although I wasn't around then.

I monitor Radarlogic for Sacramento MSA average price per square foot, along with local sales statistics (actual non-seasonal adjusted closings as reported by MLS). Looking at Radarlogic and sales levels for the most recent years (2006 and2007), during the first 3-4 months of each year, there is a modest increase in average price/foot and a modest increase in sales, then the price/foot free fall resumes and the sales activity continues its downward spiral. This trend will not last forever. At some time, and I don't know when, we will start to return to historical pricing and sales patterns. Is this time really different? Is this the year? Has the price/foot free fall ended? Will we actually see an increase in sales (month over month) through the spring and summer selling season?

Paul

27 comments:

Max said...

It's hard to know what "normal" is in this market. We've been in a boom since 1999 around here, and before that the market was depressed.

Patient Renter said...

Just looking at the historical duration of housing cycles (10-11 years), you'd be hard pressed to think that 2.5 years into a downturn was anywhere near the end, particularly coming on the heels of the biggest upswing in history.

sacramentia said...

I think each time really is a little different. Otherwise all of the Math geniuses would not have screwed up so bad on Wall St. People can look at the past and then react to the current situation, but each time it is a little different.

As far as where we are at today, I think that the rent vs. buy costs are going to continue to converge over the next couple of years.

What numbers represent that convergence is way beyond what I can figure out. (inflation, deflation, etc...)

As an investor I fully expect the terms to become more attractive to purchase real estate over the next couple years.

As a homebuyer, I'm not so sure because a third factor is introduced, your income, and that moves independently from the rents and prices of homes.

In aggregate incomes determine rents and prices, but each of us only has one income number that really matters.

Sippn said...

Sac - the real crime is the "math geniuses on wall street" ignored downside risk in the models they used to form CDOs etc that they sold as investment grade to municipalities and public retirement plans - thats why the who thing collapsed last summer.

sacramentia said...

Sippn - Exactly - I watched a Volker interview where he said that 1 in a 100 year events were happening every couple of years...

It reminds me of another show I watched on a 100yr flood in Sacramento. It sounds like a long time until it happens and we're driving boats through Natomas.

Patient Renter said...

Otherwise all of the Math geniuses would not have screwed up so bad on Wall St

The idiots on Wall Street screwed up because they paid no attention to history in choosing to setup their models to assume perpetual home value appreciation.

The market doesn't care how big of a "genius" you are. If everyone in the world thought that housing would go up forever, the market would still slap every one of them upside the face. The market doesn't care how many people it's injuring in the process and that number of people, or their "genius" is no argument against what the market is logically going to do.

G Spot1 said...

If there is one lesson I have learned over the last 10 years, it is never underestimate the greed and stupdity of the Wall Street "geniuses."

Mystere said...

Well, one thing that's different this year as compared with last is the plummeting house starts -- from the excerpt on the Sac Landing page today it looks like permits are down 58% from last year MoM. All the talk about inventory focuses on bloating from foreclosure of existing homes. But resale inventory is only part of the picture. The inventory picture looks a little different when the sharp reduction of new home construction is taken into account.

Sippn said...

AB - thought I'd have some fun and look into my gut feel about short sales (AKA "theory")

Looking at Antelope, Jan closings of 52, current inventory of 324 homes.... whats moving?

#1 REOs, #2 non distressed ("clean"), #3 short sales.

Sales: REO-40, clean-9,SS-3
Inv: REO-76,Clean-56,SS-192

Interesting - lets look where the # months inventory is and is SS inventory really available and valid?

#months,REO-2,Clean-6,SS-64

I say not really.

Max, AB - you'all notice any of this?

sacramentia said...
This comment has been removed by the author.
smf said...

"The inventory picture looks a little different when the sharp reduction of new home construction is taken into account."

Home builders have to continue building or else they will go completely under.

Regardless of whether starts are down, there is still plenty of excess inventory to work thru.

At the same time, there is plenty of evidence that out of the houses that are selling, 50% of them are STILL going to 'investors'.

And they still believe that in a few years, they will sell their houses for a huge profit.

I call this the 3rd inning still.

Mystere said...

Lol, homebuilders *are* going under e.g., Dunmore, Reynen & Bardis, etc. At any rate, the issue isn't whether builders continue to build, it's the rate at which they do so and the impact of the same on overall inventory of regional housing stock. With permits off 58%, it's clear that new home construction drastically (and appropriately) has been curtailed. How is such a reduction of new home inventory best reconciled with the current excess inventory of resale homes?

And let's see, with prices generally now down by 35+%, if this is the '3rd inning,' then by that yardstick in the 9th inning prices will be at zero..

smf said...

"With permits off 58%, it's clear that new home construction drastically has been curtailed."

About 2 years too late. Housing excesses are not quickly absorbed. Once a house begins construction, it is better finished than left to rot in the open.

"And let's see, with prices generally now down by 35+%, if this is the '3rd inning,' then by that yardstick in the 9th inning prices will be at zero.."

Repeating something (the zero ref) will not necessarily make it come true. You can banging that # around to justify dismissal of those whose positions you don't want to believe on.

Fact is, with prices having more than double, giving back 35% is mere pittance. Look back at the NASDAQ again to see what a correction looks like.

As to being in the 3rd inning, we now have some economists stating the same.

1. The low end homes are the one that are in trouble now. Higher end homes are just starting to get in trouble. How do I know? I will probably buy one $150K off the prior sale price.

2. Mortgage resets have barely started. Subprime already got killed. But you still have Option ARMs, alt-A, and prime that are showing problems. (If you care to look for links that say that, they are many and easy to find.

3. At least 50% of the houses being sold right now are to speculators that are still hoping to cash in when the market returns. Hint: I would bet big money that we will never see 2005 prices in our lifetime.

4. Jobs losses have barely started. Only lately have some started to call out that a recession has already started.

5. Prices are still for the most part unaffordable to the majority. And if people get 'priced out forever', the entire real estate market gets 'locked-up forever'.

We can go back to this thread a year from now and see how eats crow.

Mystere said...

Wow, all that from my two l'il references?

Look, reread what I said. Permits are sharply down and new construction is curtailed. It's a simple statement of indisputable fact, period. It has nothing to do with 'too late' or whatever. The issue is the effect, on balance, of such a sharp reduction of new homes on the overall inventory of new and existing homes.

Second, your diatribe is all well and good, but it has nothing to do with the fallcy inherent in your assertion that, with pricing off 35%, we're nevertheless in the '3rd inning.' I'm not the one saying prices are going to zero. You are. It's part and parcel of the claim you've made. At least now we know where the claim originated from...you're parroting some talking head 'economist,' who I'm sure isn't located in or evaluating the greater Sacramento area market, and who I suspect wasn't even referring to California at all.

And 35% is a pittance? You do realize that at 50% off (should it get there) prices will have been cut in half, right; you know, the complete unwinding of a 100% increase ('doubling,' as you call it).

Save the crow. The only one of us perceiving this as some kind of contest is you..which speaks volumes to me.

Patient Renter said...

I'm not the one saying prices are going to zero. You are.

you're parroting some talking head 'economist

You're such a pest, SMF never said that.

I'm curious which talking head economist predicted prices going to zero. Feel free to use citations.

Mystere said...

Pest? Yeah, I suppose it's irritating when someone doesn't jump right on your bandwagon. Is that really the best you can do?

If you're going to quote me get it right and do it in context. Here's the full excerpt:

"I'm not the one saying prices are going to zero. You are. It's part and parcel of the claim you've made. At least now we know where the claim originated from...you're parroting some talking head 'economist,'"

Part and parcel = implicit in the assertion of the 3rd inning being coincident with a 35% decline in general price level. By this metric, in the 6th inning, it will be a 70% decline, and in the 9th inning, it will be a 105% declne (yes, they'll be paying you to buy houses; how nifty!).

As for an economist source, I'll defer to SMF to provide it. He's the one who referenced it above. And he wasn't doing so in relation to zero, but rather in relation to it being the 3rd inning, so you're way off in your attempted barb there.

Have anything substantive to contribute?

Gwynster said...

I don't even bother with Myst, not worth the effort.

smf said...

but rather in relation to it being the 3rd inning, so you're way off in your attempted barb there.

CEO Dick Syron said the decline in home prices nationwide is only "one-third" of the way done.

This was said by Freddie Mac's CEO. Does that hold water? You decide.

Here is the link:

http://www.foxbusiness.com/markets/industries/real-estate/article/freddie-mac-ceo-home-prices-continue-drop_517358_17.html

sacramentia said...

"Hint: I would bet big money that we will never see 2005 prices in our lifetime."

I'll take the other side of that bet. 30+ years is a really long time.

sacramentia said...

I think we'll see 2005 prices again in early part of the 2020's.

smf said...

"I think we'll see 2005 prices again in early part of the 2020's."

How about inflation adjusted 2005 prices?

alba said...

Its so hard to support any claims here lately. This cycle has to be based on a different catalyst, like all others. Like the ones in the past, "this one" is more severe. I can't imagine another housing cycle exploited and leveraged into a much larger financial impact than the betting and transactions manufactured in the secondary markets of today. The banks have a ways to go, which will continue to impact all industries.

New home starts does not necessarily trigger a change in the housing cycle, just which wave of trouble is passing. New home builders were naturally the first to react to a housing slump, which is why they built as much as possible going into 2007. They've spent the year with abnormally high inventory, and will be the first to reduce it to some sort of norm. Regardless, REOs, SSs, and clean resales will continue to have an impact far longer than future new home sales. Without statistics, I'll bet REO's will have an unprecedented impact on the length and depth of this downturn.

Builders will recover. The industry will shrink. The good medium-size builders will be acquired. The poor ones smoked out. Some large builders may go under, but growth through acquisition is the name of the game.

Paul said...

Well, folks, this post brought out a lot more passion than I anticipated. Although most comments are welcome, I think this horse has been sufficiently flogged for now that it is time to move forward to another issue!

sacramentia said...

"How about inflation adjusted 2005 prices?"

That is a completely different question. At some point in my life I think Real Estate will be as unfordable to the median salary worker (6x income), although I think it will be caused by different factors:
- increased fees to build homes
- reduced percentage of homeowners due to increased concentration of wealth
- increased life spans
- higher marginal tax rates without changing the interest rate deduction.

Of course this assumes that I have at lease an average life span.

smf said...

"At some point in my life I think Real Estate will be as unfordable to the median salary worker"

Again, the phrase 'priced out of the market' comes out.

Why?

What do you think will happen when first time buyers can't buy a home?

What happens when those who can afford to move up can't sell their house?

The entire market locks up at that time.

If first time buyers can't afford homes, the entire RE industry stops dead on its tracks at that time.

sacramentia said...

SMF - There are more factors than just afford-ability. The majority could be renters and unable to afford a home. Just look at San Francisco and expand to the entire US.

I personally don't believe in the 3x income rule because it ignores accumulation of wealth.

smf said...

"I personally don't believe in the 3x income rule because it ignores accumulation of wealth."

Reality trumps the way things should be:

As the falling real-estate and stock markets erode their savings, many aging Americans are delaying retirement, electing labor over leisure in uncertain times.

http://online.wsj.com/article/SB120699498978778055.html?mod=todays_us_page_one