Wednesday, February 4, 2009

Out with the Bubble, in with the Recession

My last post wasn’t properly framed. What I was really trying to get at was two things: 1) The desirable areas, which many feel still have a long way to fall, have more or less fallen to pre-bubble levels (at least for the two zips I track), and thus 2) housing market declines from here on out, will be primarily driven by a sagging economy.

To respond to some of the comments……

“Under demand or over supply equal the same thing right?”

Same result (price drops), but they have different solutions. For example, in aviation, delay from weather, versus delay from wanting to land at an airport everyone else wants to land at, has very different implications and solutions.

“The excess housing out there has NOT been dealt with, and there are LARGE amounts still out there.”

I don’t agree. Based on my calculations Sacramento Metro area is under 5 months inventory, and has been for quite some time. Yes there are vacant homes, and foreclosures waiting to be put on the market, but I it’s not enough to get us back up to last year’s 12 month's inventory levels.

“So is this a case of using data to form an opinion, or now that you own you have an opinion and will see proof in everything and find stats to back you up?”

Probably a little of both. We wouldn’t have pulled the trigger if I felt we were still at bubble pricing levels. We had been eyeing this development for a long time and had plenty of opportunities in the past year and a half, but didn’t feel comfortable buying till now. Back when I started this blog, in April of 2007, my inflation adjusted calculations called for a decline from peak of 39% and 41% (in Folsom and EDH) to be back at “reasonable levels”. Two years later, we are very close to those levels (inflation adjusting for those additional two years).

Update: Regarding the last point, there is only a small amount of manipulation possible in my actual calculations. I primarily gather existing data and report on it. Manipulation can come from monkeying around with inflation adjustments. But for yesterday's post, I actually went to to calculate inflation over the period of my data.

It's the interpretation of the data that can be biased...hence I try to publish it all, so everyone can come to their own conclusions. I have always welcomed comments from both sides of the debate. It's how I learn to be a better analyst. Groupthink, and biased interpretation on either side is undesirable.....and is largely responsible for this mess in the first place.


Vanda said...

Option Arm, Alt-A resets and the related foreclosures are just picking up speed. They will roll for the next to years, effect the "more desirable" areas more, and will hit California especially hard.

I've been watching one of these desirable neighborhoods in LA and and have been amazed by the number million+ listings hitting the market. I've also seen the million dollar bank owned properties too.

What you consider pre-bubble levels might be subjective. In my book if the nominal price is what it was, or would have been in 2000 that's pre-bubble level.

Have you been to ? He's been saying for a while that the California housing market wont hit bottom till 2011. I used to think that he was far overestimating, but I'm starting to believe he is right.

sacramentia said...


I totally understood your point on the first post, and I agree.

This time is never different. And everything is relative.

I'd rather have a 200k asset paying 15% than 1M asset paying 1.5%.

Jacob said...

Yea the Alt-A and Option Arms are going to be an issue. Even Prime loans will be a problem.

You can't refinance because the home is not worth enough to secure a new loan and / or you don't even want to refinance cause you are so far underwater it might be better to just walk away and take the credit hit.

Inventory may be down but my question would be how many people want to sell but are waiting until the market gets better and how many homes are the banks holding back in the hopes the the Fed will buy them for a lot more than they are worth?

Job losses are going to put a hurt on home prices. Each month fewer families can qualify for a loan due to a job loss and still more families will hold off buying due to uncertaintly.

We have to stop the job losses and stop the massive amount of foreclosures. Until that happens prices will have to keep declining.

I just hope we get to the bottom faster than Japan...

smf said...

Inventory is down because of some simple issues:

1. Banks have not released all their REOs into the market. I personally know of one that has been sitting for at least 5 months.

2. Too many of those buying are still investors, and they are buying in the same percentage as during the height of the bubble.

Those stories are out there, and are not assumptions.

And as an aside to that, there are still too many people that I know, including our loan officer, than believe that this is a temporary dip on the road.

It isn't.

The only thing I don't know is how some areas will end up looking like after its all over.

Some newer areas should be well decimated at the end.

Buying Time said...

The higher end will have much more trouble "recovering". Lack of move up buyers, loan resets (but a significant amount have been refinanced by now), and expensive financing (costly jumbo loans).

There really aren't that many homes in the 521K plus price bracket in Sacramento that are affected by the loan caps (417k cap plus 20%). About 15% by my crude calculations.

2011, is certainly feasible given how quickly and seriously the economy is deteriorating. But I think the price drops will slow in Sac....not as many double digit declines.

patient renter said...

The desirable areas...have more or less fallen to pre-bubble levels

Is your pre-bubble level mid-2003? According to your graph, that's about how far inflation adjusted prices have fallen in the tracked areas.

Remember though, in a perfect non-bubble world, inflation adjusted housing prices should be perfectly flat (housing appreciates at the rate of inflation on average, per Shiller). Since your inflation adjusted graph starts in 2001 with an upward slope, we can deduce the bubble started before then.

So until things get back to levels seen at the beginning of your graph, probably even lower, we're not at pre-bubble price levels.

sacramentia said...


I don't disagree with your data points, but I do disagree with your conclusions.

REO's will continue to trickle onto the market, there really is no incentive for the Banks to hurry. I don't think this will change much from the current situation.

In order for the home ownership to return to a historical level of 64%, there are going to have to be more investor purchases for a long time. With the current rent ratios this is a transfer of wealth, not specuvesting part two.

And people will move back to California some day, and cheap housing only helps. Even DJ moved back and she tends to be ahead of the curve.

Deflationary Jane said...

"Even DJ moved back and she tends to be ahead of the curve."

Well the only I'm back is because of a divorce. Not sure I'd use me as a signifier. Now I do tend to be ahead of the curve but I'm usually wayyyyyy ahead. Seriously so much could happen between now and when the rest of the country realizes how brilliant I am! **cringes**

Back on topic, Sac's run up in pricing began in 97 with the cap gains tax exemption. So prices went up, then wages, then prices, etc like a step ladder. A pull back to 01 prices means we loose all the wage growth we've had too.

Now that we're moving back to mid 90s wages and employment rate, we'll That will also mean mid 90s prices and affordability ratios. If I take that 10% salary hit, that puts my classification back to '98. A wage cut and loosing those 2 days puts me back to the mid 90s.

I also think we're going to see a lot more single wage earner families as well which I like. I'd love to see parents spending much more time at home which I think is key to helping schools.

See what I'm thinking? It feels like a massive pull back all the way around but it may not be all negative.

verification word: somaican
is that Bloggers way of telling me to take a chill pill? >; )

Marginal Utility said...

I think these last 2 posts are missing one big concept. Like they say with investments past performance cannot predict future results.
Here, you're extrapolating a price floor based on past prices and inflation rates. What if we get massive deflation? What if the state/county/city has to lay off 20% of it's workforce (yes it could happen), what if interest rate rise to 8%? Are any of these scenarios included in your model?
I suggest you read "The Black Swan" and see if you want to change your model.

Buying Time said...

MU et. al. -

I thought that was what I was saying...

All the items you mentioned are related to the health of the larger economy (not sprecifically tied to the fact that homes were overpriced).

These types of scenarios will put downward pressure on home prices. But it's a different type of pressure. It's not longer downward pressure correcting for vastly inflated home prices.

At this point all assets are deflating, not just housing.

Marginal Utility said...

"All the items you mentioned are related to the health of the larger economy (not sprecifically tied to the fact that homes were overpriced)"

Actually, my point wasn't meant to reflect the health of the overall economy. It was meant to point out the systematic risk inherant in your model. You used a past price and assumed that it was correct. In other words, you're using a value judegment to say 2001wasn't over(or under) valued. Just because 2005/06 was an extreem doesn't mean 2009 is correct.

I beleive there's only one way to determine the relative value of a property is the "rent saving" model. has done some great work on this.

jack said...

imho we still have a ways to go for the following reasons- unemployment rates will continue to rise, sizes of houses has increased dramatically (how many people can actually afford a 3,000, 4,000 or even a 5,000 square foot house and at what price per square foot?), tougher lending standards (how many people do you know that are not on this list list that can save 20% for a down payment?) average wage now is lower than it was in 2000, government workers are losing 5-10% of salaries due to furloughs and layoffs will increase significantly at mid year when fiscal year budgets come out. Just a few quick thoughts =)

norcaljeff said...

AB, where are you getting you 5 months of inventory stats? Max still shows 12 months, which has been consistent for a while, and consistent to what I've seen on other sites and reports.