Thursday, December 4, 2008

Average Buyer's Crystal Ball

Being the ever opinionated person that I am, I was asked to participate in a year-end forum on the Sacramento housing market. I’m sure one of the big questions on everyone’s mind will be: “What the future holds in store for our metro area.”

With that in mind, I would love to hear everyone’s predictions if they dare*…..for the 1 year mark and 5 year mark. Here are some of mine (I did my best to keep it short):

1 Year – As banks complied with the legislated wait period in California, new NOD activity slowed to a crawl in the fall of 2008. This means the pipeline of foreclosures will temporarily dry up sometime in early to mid-2009. Together with inventory down significantly, this should lead to stabilization in prices for at least a couple months. But slowed economic activity and job losses will take a toll on the local economy. Excess housing inventory and frustrated sellers, will keep downward pressure on rents. As a result, by the end of the year home prices will continue their downward march, eventually surpassing what I consider affordable/sustainable levels (based on historical price/rent ratios and income).

5 Year –The economy will experience the deepest slump since the Great Depression, as consumers and companies undergo painful deleveraging. The Sacramento market will not be spared. However its housing market will stabilize before the rest of the country, as home prices have dropped the hardest and fastest here. Our local economy will also recover sooner than others, buoyed by relatively stable government employment, and a stabilized and affordable housing market. In terms of time lines… year home prices will level off then continue to fall to affordable levels, with years 2-4 seeing no increase, and perhaps single digit decreases, in prices as excess and distressed inventory are absorbed. Finally in year 5, modest appreciation will be possible as the housing market and local economy eventually find their footing.

Unfortunately I see no end in sight to the economic troubles our country is facing. Of course the big wild card in all this is the government’s response, which can drastically change the timeline, but not necessarily the forestall end result. I do however consider myself optimistic on our local housing market. I know of several first time buyers getting into the market now distressed inventory has made select areas of Sac accessible (note that I used the term accessible and not affordable).

*Making public predictions is a pretty tough gambit, as we have been through quite a roller coaster this last year, between wildly fluctuating commodity prices, a change in administration, and the demise of the investment banking industry, it’s hard to imagine what the future has in store for us.


Paul said...

I mostly agree with your prediction, however, I'm not quite so pessimistic. I think the effects of the "stay" in foreclosures is mostly behind us, unless Obama implements another stay when elected (something he promised to do).

I also think that although the recession will be severe, it will not last five years (although I'm not sure that is what you were implying.

I think your 1-5 year home price prediction is right on the money!

patient renter said...

Well since you asked :)

My home price predictions are on par with yours. 1 year, prices still declining, in some areas more than others meaning bifurcations continues to be an important theme, though I don't really see a sustained false bottom like you mentioned. 5 years, prices beginning to find a bottom, though the bottom will probably hang around for a few years before we get the modest increases you mentioned.

2 things to keep in mind. First, this was the largest housing bubble in history. There is no reason to think the market will bounce back any faster than after any previous bubble, which means the bottom is still a few years off.

Second, I'm still looking at the ARM reset schedules, which many analysts seem to conveniantly ignore (maybe you can mention this in the forum), and I'm seeing massive amounts of resets through 2011, including a lot of Option ARMs. Those option ARMs are all but guaranteed to become foreclosures. So any bottom prior to 2011 is not in the cards, IMO.

As far as predictions for the broader economy, I have no idea.

Buying Time said...

Yes, the continuing ARM resets are why I think our economy won't be able to pick up much traction until some years out (say 2011).

I don't think it will be a dire as originally predicted due to work-outs, refinancing, and perhaps foreclosures due to people walking away before the reset (cause they owe too much).

If you look at Tanta's post on reset vs. recast, you can see most of the sh!t hits the fan in 09/10, as opposed to later on:

sacramentia said...

1 year - Bottom Quartile of homes stays at about the same price, falls less than 5%.

Top Quartile falls 10-15% over the next year as stock market losses and recession hit the higher income earners.

Middle 50% somewhere in between.

2010 - Great deals in top quartile as the Alt-A and Option ARMs explode. Early 2010 = Bottom.

5 years out - Interest rates and growth are on the low side. Real Estate is back to tracking inflation.

Vanda said...

1 year: With unemployment in double digits and foreclosure moratorium lifting, foreclosures jump up, prices plummet. People who bought in 2008 are surprised to start finding themselves underwater.

5 yeas: After a couple of years of volatility economy finally stabilizes, though recovery is slow. At around 2010-2011 finally housing prices hit bottom at year 2000 levels. They stay flat at first, then start slowly climbing up again.

anon1137 said...

I sort of agree with PR. I think the price declines will continue next year, but become more widespread. Up until now, new developments and lower income neighborhoods have taken the biggest hits.

Longer term, there are those mortgage resets and there's the issue of the "Great Submerged", those homeowners who can afford their payments but are $100K or $200K underwater and therefore frozen in place. Those two issues, plus unemployment, will keep a lid on prices.

I don't see any reason this downturn couldn't last 10 years or more. The global economy is going to be fueled by growth in China and India instead of the US, and I don't think we're going to be supplying much of what they need to grow. We'll be paying off these bailouts, and for W's folly in Iraq, for 2 or 3 generations.

Buying Time said...

Agree with Sactia on where the majority of drops will occur, primarily upper & middle price ranges. For example, Folsom has over 233 forecloures according to a site, only 64 of the are listed on MLS, and only 313 total MLS listing..... EDH in not nearly as bad.

Deflationary Jane said...

My optimistic view is in line the Sacramentia. Someone wake me >; )

The bottom can fall a bit more, especially if lending to investors remains tight. From the grumblings I'm hearing from folks in lending, NOO is squeeky tight and if you really want something, bring cash.

The upper 2/3 are now starting to have their CTJ moment, as seen by the steady ticking down of price deductions in the last 4 months. We had some GFs rushing in but that is tapering off as the news of major job losses hit.

The problem is the coming wave of unemployment. Impossible to quantify because we don't know how much the new administration is going to interfere and/or mitigate those losses.

The folks in the middle 1/3 of economic strata had a feeling of invinceability but that has worn off. It's very similar to how people viewed NAFTA/outsourcing way back when. It was ok when it was effecting the lower 1/3 ("serves those poor people right for not working hard enough to improve themselves.. yada, yada, yada") but it was quite the shock when those reasonably lucrative tech positions began being shipped overseas. It was never suppose to happen to _them_.

sacramentia said...

DJ - Speaking of CTJ moments, I had 2 calls in the last month from friends that have had lines of credit frozen and both just couldn't believe it happened to them. These are people with perfect credit and incomes of 425 & 700. It's getting ugly out there.

Husmanen said...

BT, you mentioned historical price/rent ratios and income for year one. I like these methods (GRM, CapRates and NOI) and I think the data can tell you a lot about the downward pressure on house prices. Also, median income vs median price, as well as a ‘what if no bubble occurred scenario’ which can give you some additional measuring points.

1 year. In year one I see the pressure continuing and no let up (at least continuing at current rate) but, as many have mentioned, the amount of pressure depends on your area. Based in data I collect on house rentals, I agree with Sacramentia that the bottom will fall less than 5% but the middle and upper have a way to go, even in year one. My guesses for Middle and Upper are a little more aggressive.

Middle, my guess 20% (seen some close to 10% but most >25%)
Upper, my guess 30% (seen some close to 20% but most >35%)

Unemployment will hit the Sacramento area hard if there are drastic government cutbacks or cutbacks by employers like Intel, HP, Health Care Industry (BSC, Hartford, VSP, Health Net etc).

5 years out. Scary. End of a deflationary and beginnings of an inflationary period. Got to pay back the bailouts with dollars that are worth less.

alba said...

As always, housing prices don't have any metric to be based on when the macroeconomic picture hasn't yet unraveled. We've seen false wealth disappear, but we haven't begun to see real wealth disappear.

Look at the Detroit 3; they, as an industry, are a telling sign to what has happened already in corporate America; Firms, legally and without any concern for employees, have converted pensions from Defined Benefit to Defined Contribution. In many cases, they just cut off employees, and went to 401K matches.

Those on the dole with autoworkers union pensions will see their paychecks cut down to size, and will see the Pension Garauntee Check signed by BO.

Govt, workers, unions, police, fire, and all other civil servants, will fall to this inevitable, and occuring, shift in our culture. No pensions!

So many firms were already underfunded, the downfall of the investment market will make it impossible for them to catch up. How much has CALPERS lost? They will never make it up.

Its not time yet to predict housing prices.

alba said...

Sorry, I didn't answer the question. 1 yr - massive job loss in corporate and service industries. 5 yr - massive restructuring of quasi-govt and govt employment - no pensions for active employees.

Housing in Sac (5yrs): flat, but much lower than we can imagine; I agree in potential modest gains...but from where?

Deflationary Jane said...

Well now I'm really spooked. UCD normally has about 140 positions open, they were down to about 80 a few weeks ago. Tonight there are just 4 open.

RV6Flyer said...

"The global economy is going to be fueled by growth in China and India instead of the US"

Ha, not likely. China is building ghost towns, they are going to fold like a house of cards and take the US down with them by selling out debt.

"Well now I'm really spooked. UCD normally has about 140 positions open, they were down to about 80 a few weeks ago. Tonight there are just 4 open."

This happens in every economic downturn. I have been through many a hiring freeze. They are always temporary.

My prediction is a bottom in Q1 2010. 2012 will see pent up demand in all parts of the economy along with rapidly rising inflation. Wage growth will be fast and the housing market will be in the beginning stages a nice recovery.

RV6Flyer said...

I mean to write China will be selling our debt.

Sold in '05 said...

The unspoken word must be spoken...

It is impossible for the low end to stay where it is while the upper end comes down. As the upper end of the nail is hammered ever downward, the lower end of the nail will move ever deeper into the wood.

If a Ferrari moves to the price of a Corvette, what will the price of a Corvette do? If you can get a Corvette for the price of a Camary, what will the price of a Camary do?

We all think that the low end of the housing market has become reasonably priced, but it wasn't that long ago that "reasonable" only had five digits after the dollar sign (in many parts of the country it still does). Plus the great middle class has never been happy living in the lower end. With average SINGLE income in the area somewhere between $50-60k, and unemployment making dual incomes less reliable, the middle of the housing price bell curve should move to $150-180k and the low end to significantly lower than that. The nail will move on in one piece.

It is no longer wise to use past trends for our data points. We have crossed tipping points that have made our economy vastly different than any in living memory, and due to the supercharged velocities associated with modern information, finance and business, it is probably incomparable to ANY economic climate in history.

All together now, let's take a deep breath and say the word that we will all soon learn the greater meaning of... DEFLATION.