Tuesday, January 10, 2006

A Housing Bear

I'm sorry about not being able to post much lately.

I found this article which does a nice job of factually summarizing the housing bear point of view for those of you who are so inclined to entertain it. Most of the points made in the article apply more or less equally to Marin since despite Marin's inward-looking nature, and dare I say "narcissism", we are nevertheless a part of the rest of the economic world. At the very least it should generate a lively discussion.

Some other points to consider: The author makes a case for why the Fed will continue with rate hikes but failed to mention that not doing so also risks further weakening the dollar. Also, while reading the article this graph would probably be better to refer to instead of the one the author uses which is for San Diego. Further, it is worth keeping in mind that the difference in rates between ARMs and longer-term loans is narrowing (as can be seen here) and I don't think moving to 40-, 50-, or 60-year loans will do much good for the reasons explained here.

8 Comments:

Anonymous rejunkie said...

The part I really like is the plug at the end:

I see the commodity markets as the premier place to invest during this upcoming recession. Like the recession of the 1970s, I also expect to see rising inflation and soaring commodity prices

...and if you click the author's website link, lo and behold, it leads you to a commodities brokerage web site.

Not much different from reading the rah-rah assessments of realtytimes.com, authored by realtors, telling us that it is always a great time to buy...

Marinite, I think your analysis is more thorough than this piece.

Jan 10, 2006, 8:51:00 PM  
Blogger Marinite said...

Ignore the plug at the end. The rest of the article is what is relevant.

Jan 11, 2006, 8:54:00 AM  
Anonymous by_palladium said...

Though I am a confirmed housing bear, I sometimes wonder if I might be totally wrong and that the idiotic prices of housing here and in the rest of the coastal parts of the country might actually flatline from here or even gradually drift up over an extended time period.

Here's why.

Suppose that the US dollar bear market resumes (after taking a break last year) against the asian and world currencies. The virtuous cycle of asian central bank lending supporting interest rates ends, and rates go up, but not much since the government will purchase whatever debt is needed to keep the yields low with newly printed dollars.

Effectively, this makes real assets like commodites and real estate appreciate in dollar terms. For sure, large parts of the rallies in energy, real estate and especially precious metals are due to the depreciating dollar.

I know that is simplistic, but that is one way that dollar prices of Marin real estate could contiue to drift upward, but could in absolute (commodity, gold or foriegn real estate) terms dramatically fall. Additional cash infusions to owners in terms of inheritance or offshore investments would only help to underpin the RE market here.

Just a nagging scenario in the back of my mind...

Jan 11, 2006, 12:11:00 PM  
Blogger marin_explorer said...

I sometimes wonder if I might be totally wrong and that the idiotic prices of housing here and in the rest of the coastal parts of the country might actually flatline from here or even gradually drift up over an extended time period.

I wonder that too, then I consider the end-user. What's the future for the home consumer? Another decade of easy money, or will wages somehow adjust to meet housing prices? Many families already feel the pinch. If their monthly rises, how many new buyers will want to jump in?

Let's say we have have continued appreciation (or even a flattening) while credit tightens over the next 10. In coastal metro areas, we may see a continued exodus of professionals looking for better return on their salary. With many already bought-in "at any cost", we may be past the peak demand--unless we see another wave of retirees/investors.

Then again, maybe the wealthy of Marin will just sell houses to one another, keeping supply artificially low? I people don't need to sell those 2nd, 3rd, etc. homes in Marin--will they?

Jan 11, 2006, 12:36:00 PM  
Anonymous by_palladium said...

Here is an example.

Across the street from me is a house that has been vacant for more than 2, and I think almost 10, years. The owners are the adult heirs of the original owner.

The rest of their inheritance seems to prop up their boring middle class life in southern marin. And they like to visit this house once a week to use the piano and the pool (which seems bizarre since it is rare that the air temp is higher than 70).

From what I can tell, that house will not be on the market anytime soon....

Another example is my rental. It is owned by a couple of professionals who probably bought it 20 or more years ago and used it as their principle residence over most of that time. Their cost basis is so low, I can't see them getting washed out of being in the investor market. Their cash flow will easily be able to keep them in their other home for a long time.

Lastly, on my 15 house cul de sac, there hasn't been one house for sale in the past 2 years. Basicallly, there is no property market.

What I am getting at is exactly your last point - in southern marin, I cannot see a scenario - short of national/global financial crisis - that would compell even a small portion of the "owners" in my area of Tiburon to sell. And on the other side of the equation, I can't see a scenario that I or anyone else (short of an inheritor) would buy.

And that is why the market seems siezed up.

Jan 12, 2006, 8:47:00 AM  
Blogger Marinite said...

What I am getting at is exactly your last point - in southern marin, I cannot see a scenario - short of national/global financial crisis - that would compell even a small portion of the "owners" in my area of Tiburon to sell. And on the other side of the equation, I can't see a scenario that I or anyone else (short of an inheritor) would buy.

And that is why the market seems siezed up.


The price of a house, should it go on the market, is determined on the margins. It is determined by those houses that do sell. It doesn't matter if a puny fraction of houses sell or a large fraction sell. How else could they have gone up in price?

According to the realtor I am friends with, there are a ton of houses that were bought with speculation in mind (the kind of speculation where they buyers intend to sell sooner rather than later). She estimated it at 40%. But without hard figures I consider that hearsay. A lot of the investment purchases are in Novato. A lot are in the newer developments of southern Marin such as those in Corte Madera (e.g., where the quarry used to be), Mill Valley (e.g., that large development on the side of the 101 just before the hill into the Mill Valley area, maybe that's Corte Madera still), etc.

Jan 12, 2006, 9:15:00 AM  
Anonymous by_palladium said...

Maybe 40% of the houses were bought as investments, but I don't see it (in the tract section of Tiburon where I am). The most common scenario is an owner takes some equity out of their original house that they have owned for 15+ years (probably originally bought with inheritance money), buys one accross the street, renovates it and moves into the newly renovated house. I have seen this (with slight variations) on approximately 10% of the houses in my neighborhood.

All the people who are doing this are long term owners that just own one additional house. Their cost basis (and tax basis) is so low, that the rental is cash flow positive - even with relatively low rents.

Should their own finances deteriorate then there might be some liquidation - but that possibility looks remote.

You are right though, the marginal buyer sets the price and the comps for the neighborhood. In this illiquid market, I don't think people fully appreciate the volatilty that this implies.

I really only have experience with my shaggy little bubble priced neighborhood.

Jan 12, 2006, 1:51:00 PM  
Anonymous Anonymous said...

Some areas like Tiburon and Sausalito are specialty markets that may not be effected as much in a market without huge macro economic decline. However I think the subject is still highly relevant to most other areas, especially a lot of POS homes which are way over the junk/value ratio.

Jan 13, 2006, 3:40:00 PM  

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