Monday, August 23, 2010

Losing the Bubble

In aviation, there is a great saying people use when they lose situational awareness, it's called "loosing the bubble." The origin (best I can tell) is related to a piece of equipment that uses a bubble to helps pilots orient themselves to the ground. So when someone "loses the bubble" they become disoriented and don't have a full grasp of what is going on around them.

So all this to say, I have lost the bubble on housing recently. Probably no surprise given that my posts have become very few and far between . So please keep that in mind as you read the following observations.

After a really great June, both sales and prices were up year over year in Folsom and EDH, July was less than stellar as many analysts had predicted (with the end of the government handout). For the most part, we are still off recent lows, but not by much.

What really has me worried as of late, is the build up in inventory. If this continues, we could go back to the era of double digit price declines. According to housing tracker, Sacramento inventory has been steadily climbing, and is now at levels we haven't seen since November 2008. Folsom and El Dorado Hills don't appear to be abnormally high, but we are moving into the time period where it gets harder to move a home.

There are a lot of analysts predicting a double dip in housing. I'm still thinking, for the Sac Metro area, flat year-over-year for several years (no appreciation, but not much depreciation either). Foreclosures and NODs appear to be cresting, but I continually hear stories of new ruthless defaults.

On a personal note, I don't imagine I will make much effort to get my bubble back. I thrive on new challenges (our garden is my new project), so posting activity will continue to be very sparse, and eventually go the way of Sac Landing and SacRealStats.


husmanen said...

Good post. Nice double entendre with the use of the term ‘bubble’. It is entirely possible that you may get your bubble back, but I don’t think real estate will for many, many years.

Do you think that it is possible that ‘losing the bubble’ could also influence your perspective on describing June as ‘really great”? If you had not bought when you did, is it possible you may have worded that differently? It just might be perspective. I am still on the ‘outside’ and this definitely influences my view, and I try to let the data guide me but not always easy.

Or are you starting to see the typical affordability metrics in line with historic norms?

I see quiet a mixture, a handful of places are well within typical affordability metrics in Folsom and EDH but I would say the majority are not.

Of late the price reduction emails are clogging my in-box, mostly from those that missed the government subsidies from a few months back. That coupled with the inventory trends shown on looks like we might be in for another dip.

Lastly, I fully understand about moving your ‘bubble’ efforts in another direction. Not sure where I will put my efforts until the right deal comes up, but once we buy a house it will be gardening and swimming in the pool – that my wife is a little concerned about ;-)

Buying Time said...

According to my data, the last time sales, median price, and price per sq foot, were all positive (year over year), was in March of 2005. So compared to the last 5 years of data...I think that qualifies as really great (I'm referring to the EDH numbers).

As far as affordability goes, I am not really paying attention any more to rents. But am starting to wonder if there might be some upward pressure on rents at the higher end, due to lack of supply. Speculator/landlords like mine have been foreclosed on (and I seem to recall your's is getting close as well) and I don't believe the investors are as willing to swoop in as Sactia has pointed out.

Giacomo said...

Double-dip? In reality, there never was any recovery (or bottom) in the market, just a "head fake" created by a government/RE industry campaign designed to win elections and generate commissions.

I have realized that on this occasion, analyzing local stats was the wrong way to decide when (or if) to buy a house. That would be a appropriate method in a fairly normal economic cycle, but not in the wake of a historical RE bubble, in the face of a major depression, and with massive government intervention taking place.

What was needed was an eye on the big picture, an healthy skepticism.

Enjoy your garden.

smf said...

Why anyone would think that this bubble is over is beyond me. You have the biggest, worldwide bubble ever, and 5 years after it started to collapse we are on the way to recovery?


A stock market moves faster than the RE market. And 10 years after the biggest stock market collapse, it is still 50% below its high.

And no one purchases tech stock on the assumption that their prior highs will be reached 'soon'.

Yet the housing market is supposed to somehow move differently?

Jacob said...

I still hear people admit that there was a bubble but still think prices will go back to the bubble price...

I also remember a story a while back, there was a poll taken on how likely you would be to sell your home if the market recovered, and it was something like 75% or more would at least consider selling.

Besides the excess supply that the banks have there are other problems. One being the people that are just waiting on the sidelines for a chance to sell, another is builders who will be able to build new homes cheaper and cheaper.

If demand increases a bit there is more than enough backup supply to crush it.

Home sales dropped 25% from June to July, for Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo, and Yuba counties. Also median price dropped 5.5% for the same period.

This happened during the peak selling time and also happened while rates continue to drop, currently around 4.42% for a 30y.

Giacomo said...

Jacob, correct on all points.

The pent-up supply of organic sellers is largely ignored. It would seem to include most of my neighbors!

smf said...

Isn't the population of California decreasing, or at least not growing as fast?

If there are no buyers, there are no sellers.

Jacob said...

CA population is technically even but really that means it is decreasing in the short term at least.

Migration in - migration out + births - deaths.

I think (at least a few years ago) that migration was roughly even and births were > deaths so the population was increasing, but that doesn't help the housing market as I think it was hard for babies to get loans even during the bubble...

I also remember a story a while back were u-haul was having to pay for trucks to be delivered to CA because more were leaving than were coming back.

Housing busts follow a pattern:


There was plenty of denial, and I would say we got into panic mode with all these bailouts and talk of GD 2.0. But we have not hit capitulation yet. It may take years but I have no doubt it will eventually happen.

sacramentia said...

My bet is that the Mexican standoff continues between the Banks, the Gov't, and the Buyers.

The Banks continue to sit on inventory and are slow to foreclose because they cannot afford to take the loss on paper.

The Gov't does nothing and continues to support 99% of the mortgage market as a sort of stimulus for main street.

The median drifts down single digits for the next few years, and prices compress around the median because there are too many big houses that people chose not to or cannot afford.

And the whole process just drags on making situation depressing.

husmanen said...

Sacramentia. Interesting, I have not heard this compression theory before.

That could make the marginal price difference between the median and high/low end small in numbers. That would then mean that in absolute numbers there is a small difference but a huge difference in those interested or qualified.

Very interesting.

sacramentia said...

It isn't my idea. It happened for 20years after the depression as a result of the credit bubble bursting and the political climate following the depression with higher taxes and programs which redistributed wealth. I think I read it in one of Krugman's articles or books.

I think we are seeing this play out right now in EDH. A home that is 2x the median price is selling for below construction costs, while homes under the median are still selling for far more than replacement costs. And it isn't location. The higher end homes are on far better lots than the lower end homes.

I really like all of your rental price arguments, and think that the general price level of rentals will dictate what happens to the median price, but I don't think rental prices correlate well with specific homes, with less accuracy the further you get from the median. The distribution of price around the median is more affected by government policy.

smf said...

The problems with big homes is rather simple.

If we go to the time before the bubble and check on the sizes of the best homes around the metro area, it becomes very clear.

Find the size of homes around the Fab 40s. For many decades, a 3000 square foot home was a big home. 5000+ were mansions for the very rich.

But during the bubble, these became almost normal size, since the bigger the home the bigger the profit.

But a big home, or any home, is not about a mortgage payment alone. They come with other large costs that some forgot about.

sacramentia said...

SMF - When I follow your logic I get stumped on how much of the larger homes are driven by technology vs. credit availability. For example when a 3000ft home was a mansion, the stucco both inside and out was done by hand, trusses calculated with a slide rule and cut by hand, etc. Clearly some are the expansion was credit, but not all.

And back then the creature comforts weren't even there. You could build an affordable 4000ft home for anyone today if you left out A/C, dishwasher, just had a fireplace and only put in small dual pane windows.

There has to be more than just credit to explain this, but I am stumped.

husmanen said...

Sacramentia. Agreed that rental-parity does not always match market prices, especially as we get farther away from the median where quantity decreases and quality increases.

Having said that I am considering a SS where there are currently renters in the property. The PITI plus other costs comes out to within 5% of the rental price. The home is in a very nice area and I can confirm the monthly rental price is market baring.

One interesting note, I was listening to NPR this morning and a person in Riverside was discussing selling their house, but it was worth only 50% of what they paid for it a few years ago.

They considered renting but renting would only cover 50% of the costs.

Hmmmm, sounds like two market indicators are spot on. Wonder what they will do?

husmanen said...

Sorry that was not Riverside it was in Montrose, Colorado.

sacramentia said...

I wonder how the price of the home compares to the median for the area?

That is just a crappy situation to be in.