Wednesday, March 01, 2006

January and February, 2006 Pivotal Months?

January and February, 2006 seem to be potentially pivotal months for the housing markets. Speculators seem to be abandoning this doomed ship. Even some industry bulls are turning bearish (I guess they cashed out their options and can now afford to call it the way it is). Can we panic yet?
  • It's not just Marin's and Sonoma's inventories that have gone ballistic. Housing inventory across much of California is swelling far in excess of normal. Across the country, it's "off the charts" (and here) [despite the fact that January was unusually warm and thus conducive to sales].
  • Even Santa Barbara, a county that some people here would like to say Marin is similar to, is "cooling"; inventory is way up and sales are way down.
  • Brokers are warning of a likely wave of "severe delinquencies" stating:
...half of subprime ARMs will be due in the summer and over the next 14 months. "There will be some people who can't pay for an ARM change," Mr. Drawdy said. "That is why you must make sure there is a system in place for collections -- to make sure borrowers know their options."
  • An interview of industry experts (Countrywide Financial CEO Angelo Mozillo, KB Homes CEO Bruce Karatz, and Yale University economist Robert Shiller), conducted by financial reporting diva Maria Bartiromo, was published in the latest edition of Business Week (subscribers only, sorry) showing that even the Big Cheeses of Housing have done "a 180" and are now bearish (well, Shiller was always cautious):

“How would you characterize the housing market right now?
MOZILO: The market has turned. The psychology of the buyers for single-family homes has clearly changed. We are seeing it from the flow of loan applications. If I had to pick a time, I would have to say it turned in January.”

“SHILLER: The real question is: Will it be a soft landing, or will prices come down substantially? It’s hard to say because this is the biggest housing boom that this nation has ever seen, so we are in uncharted territory. I worry about a big fall because prices today are being supported by a speculative fever.”

“How severe are the price declines you are expecting?
MOZILO: I would expect a general decline of 5% to 10% throughout the country, some areas 20%. And in areas where you have had heavy speculation, you could have 30%. We will see…sellers back off from the prices they have been demanding. A year or a year and half from now, you will have seen a slow deterioration of home values and a substantial deterioration in those areas where there has been speculative excess.”

“SHILLER: In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. I can see that happening there again or in any of the cities that have had tremendous price increases, and there are quite a number of them in this country. I think a pullback of as much as 40% is plausible in many places.”

“KARATZ: I don’t see a fundamental slowdown other than in the hottest markets. Things don’t continue through the roof forever. In some markets, 10% to 15% of buyers were speculators. You take them out, and the market drops 10% to 15%, and it takes three to four months for whatever overhang there was to be sold.”

“Where are the most vulnerable areas?
MOZILO: Miami and Fort Lauderdale. Las Vegas is another area where there is heavy speculation. That means people were buying three, four, five condos at a time and thinking they can flip them. Those are the spots we have identified where… we will only make loans when we know the person will live [in the housing].”

“SHILLER: The most spectacular cases are Phoenix and Las Vegas. They soared so suddenly. But others [are vulnerable, too,] such as San Francisco, San Diego, L.A., really much of California.”


Blogger sf jack said...

Did you see the new CAR figures for January?

y/y price declines for Cupertino, Mountain View, Burlingame (-21%) and San Rafael (-6%).

It could be coming to a locality near you.

Also, interesting chart here from a NY Times article by David Leonhardt today:


Here's the just as interesting article:

David Leonhardt - New York Times

"Don't Fear the Bubble That Bursts"

Published: March 1, 2006

"YOU remember the great real estate crash of the 1990's, don't you?"


Mar 1, 2006, 11:53:00 AM  
Blogger Marinite said...

Can't be. Everyone wants to live here. Friends who left want to come back but can't...etc...

Thanks for the reference. I've been too busy at work to give the blog enough attention lately but I promise (or is that threaten) to do so soon.

Mar 1, 2006, 11:59:00 AM  
Blogger sf jack said...

Don't worry, marinite, you do a great thing here!

Mar 1, 2006, 12:26:00 PM  
Blogger Econ_101 said...

My thoughts exactly - I was going to do a post that was very similar.

When this bubble is added to the bubble chapters of econ textbooks, my guess is that Jan and Feb 2006 will mark the real turning point (although prices in many bubble markets have trended flat to a little down since late summer 2005).

My guess is that we are only 2 or 3 months from the big drops in the most speculative bubblettes (oh, I mean balloons).

Mar 1, 2006, 12:51:00 PM  
Blogger Marinite said...

No, they're ships now. Geez, get with it. ;)

Mar 1, 2006, 1:00:00 PM  
Blogger marine_explorer said...

This comment has been removed by a blog administrator.

Mar 1, 2006, 1:18:00 PM  
Blogger Marinite said...

And we bloggers the wolf pack. With torpedoes. Maybe duds. We'll see...

Mar 1, 2006, 1:27:00 PM  
Blogger marine_explorer said...

This comment has been removed by a blog administrator.

Mar 1, 2006, 3:05:00 PM  
Anonymous Anonymous said...

I read the article but there's one thing I don't get: How is a price reduction of 10% to 30% a "crash"? Especially after runups of over 100% in many cases?

Mar 1, 2006, 4:50:00 PM  
Anonymous Anonymous said...

"I read the article but there's one thing I don't get: How is a price reduction of 10% to 30% a "crash"?"

A return is calculated as the money you make on your initial investment (cash down).

Let's say you buy a house for 600K with a puny cash down, a 200K drop in price means that your ROI is MUCH lower than -30%.

Not to mention that 200K is more than the median boomer's net worth.

Mar 2, 2006, 6:00:00 AM  
Anonymous Anonymous said...


It's just plain old arithmetic:

House in 2000 = 200K
House in 2005 = 400K
= return of 100%

If price drops by 50% you lose the entire 100%!

Mar 2, 2006, 6:05:00 AM  
Anonymous Anonymous said...

Well, on the one hand you're talking about leverage. Your example about leverage is as you outlined on the downside (as the reverse is true on the upside). If you're caught on the negative side of leverage that's an unfortunate situation....not necessarily a "crash"
Your example shows a 50% reduction in price...not the 10% to 30% that typically happens in a cycle. ( A much more likely scenario) Assuming a 20% reduction off the 100% gain the house you paid $200k that went up to $400k then drops 20% ($80,000), leaving the value at $320,000. Still an increase of $120,000. Of course, if you got in at the end of the boom and don't have any equity yet and now (for some reason) you have to get out, you're caught behind the leverage 8-ball. As a result, there will be people forced to sell and prices will come down, but I really doubt the "sky is falling" -"bail at any cost" mentality. People hold onto homes much stronger and longer than they do stocks. Many find ways to ride it out even if they can't "afford" it. As a matter of fact, people don't even bail on stocks the way they used to. Maybe people are getting smarter with regard to understanding "cycles".

Mar 2, 2006, 9:04:00 AM  
Anonymous Anonymous said...

Your example shows a 50% reduction in price...not the 10% to 30% that typically happens in a cycle. ( A much more likely scenario)

Remember, this cycle is rather unlike any RE before, as those graphs up the page suggest. How this plays out is anybody's guess, but ask yourself: does a 30% correct revert prices to a level supported by long-term economic trends?

Mar 2, 2006, 9:14:00 AM  
Anonymous Anonymous said...

People who ride it out, and most will, will just find that the price of their house has been reset by those who sold. So as an owner you have to ask yourself: do you think you will want to sell your house in the next few years. If so, do you mind that other people have the control of setting the price of your house?

Mar 2, 2006, 9:19:00 AM  
Anonymous Anonymous said...

In the past housing bubble of the late 80's/early 90's a lot of people did sit tight in their homes and "ride it out." I don't think many people will have the luxury or the option of sitting tight and riding it out in their over valued homes this time around. Investors won't do this; they won't sit tight with their money-loosing propeties. They will bail and they are already doing this.

Speculators and people who did suicide financing won't be able to sit tight and ride it out either. When their interest only expires and the adjustable rate resets they will not be able to afford their mortages anymore. Yet at the same time, they will not be able to sell either because they are "upside down/underwater." They probably don't have the money to bring to the table for the closing costs and paying the bank or mortgage company the balance of the loan. So what is left for them since they can't pay their bills and they can't sell their home and they can't sit tight? The only options are foreclosure and bankruptcy. I expect to see foreclousures and bankruptcy increase in the coming months and the coming next few years.

Also, this bubble is unlike any real estate bubble of the past. You cannot use existing economic models and plug in data such as incomes; home values and the economy to predict or forecast the outcome of this bubble. The 2000-2006 bubble has some elements that were not in the late 80's/early 90's bubble; such as the 30-40% speculators in some bubbly areas; the tons of investors; the widespread use of suicide financing; the heavy re-financing; the negative savings rate; the fact that people are leveraged beyond any reasonable ability or hope to repay their loans; "the plastic fantasic" living on your credit card lifestyle/credit bubble happening at the same time as the housing bubble. Oh, and the biggest factor that no economic model can account for is what I call the "hysteria/mania/frenzy" factor of this bubble that wasn't around to the extreme in the earlier bubble. This factor cannot be quantified and placed on a graph.

It is for this reason that I predict that when this housing bubble busts, we will see declines of 50%-60% in the most bubbly areas. Prices will overshoot going down. Just as homes sold above and beyond their fundamental value, in due time, they will start selling below their fundamental value when revulsion sets in. So those homes in La Jolla, CA selling for 1 million are probably fundamentally worth only about $450; they will go down to $400 or even less. What will make this bubble unravel quickly (its been un-raveling since the last quarter of last year) is the suicide finaning. It will probably be the worst asset bust in history. I look forward to the bloodbath!

Mar 2, 2006, 11:24:00 AM  
Anonymous Anonymous said...

Ride it out? I'm not so sure.

Here in Canada, 85% of the real estate debt of the last 5 years has been taken on by 45-50+ while ownership in the 35 and less has dropped.

It's fair to specify that the 45+ also represents the largest group.

In the early 90s, they rode it out because they still had many productive years ahead of them. Today, according to a few surveys, 50% of them want to move to the country or a condo.

I know Quebec is no California but something tells me the waiting period won't be as long this time.

Mar 2, 2006, 1:58:00 PM  
Anonymous Anonymous said...

I think you are really hoping (for some reason) for the sky to fall...which, by the way, it never does. While there are areas with more speculation (as there were last time) in areas like Las Vegas, etc. that will be hit harder, I think you are forgetting something about how these cycles work. Towards the end of a bubble like this one you have people getting in way over their means and over-leveraging. We've all seen this over the last couple of years. Many will be hurt and some will find ways to ride it out. You know there are lots of people who will never sell until they "get their price" no matter how unrealistic their price may be.
These "last waves" of leveraged buyers are the ones who will bring prices down, but in an area like Marin, not even close to the levels that will be seen in areas of high speculation. Prior to the most recent wave of leveraged buyers, there was year upon year of refinancing 30 year (or shorter term) conventional mortgages with lower and lower fixed rates. These are people who as a result, are in much better financial shape than they were before they refinanced. This is a "wall" of established homeowners with tons of equity. These people bought their homes to live in...not to "flip". They tend to be older, more established, and are high earners that drive Marin to have the highest per capita income in the state. They are here for the long term. And while they don't tend to be as emotional or make a lot of noise as most speculators do, they are the majority of people I talk to in this county.

Mar 2, 2006, 2:40:00 PM  
Blogger moonvalley said...

And we bloggers the wolf pack. With torpedoes
There were printed warnings in all the American papers before the Lusitania sailed warning Americans not to take the ship, that the German navy was determined to sink her. In some cases, prominent persons were even sent telegrams and phone calls were made. Still, they decided it was rubbish and sailed away. The wolf pack was waiting. Can't say they weren't warned. Same with the Housing Bubble.

Mar 2, 2006, 7:37:00 PM  
Anonymous Anonymous said...

Chicken Little was in the woods,
A seed fell on his tail.
He met Henny Penny and said,

"The sky is falling.
I saw it with my eyes.
I heard it with my ears.
Some of it fell on my tail."

He met Turkey Lurkey, Ducky Lucky,
and Goosey Loosey.
They ran to tell the king.

They met Foxy Loxy.
They ran into his den,
And they did not come out again.

Mar 2, 2006, 8:45:00 PM  
Blogger marine_explorer said...

A couple of questions: what is the level of speculation in Marin, and how many homeowners bought recently using those creative IO/ARM mortgage products? If I'm not mistaken, Marin's figures are similar to the rest of the SF Bay. I could say this again, but my research into BK/Foreclosure stats suggest people expose themselves to risk to live in status areas, whether that's Los Altos, Los Gatos, Palo Alto, Marin, etc.

Mar 2, 2006, 11:12:00 PM  
Anonymous Anonymous said...

"I think you are really hoping (for some reason) for the sky to fall...which, by the way, it never does"

Literally I agree, figuratively it often does. Never is a very strong word. Should I make a list of world events that have made life less than enjoyable for its people?

I think North Americans have become complacent. We've benefited from a few decades of peace (on our soil) and economic growth which have made us think that we live in a safe world where what's ours is ours and what's theirs is ours.

Let's face it. We need the world's resources to continue living our hedonistic and materialistic lives and boy do we need a lot of it! Further amplifying this issue is the fact that, thanks to telecommunications and technology, we are now broadcasting to the world images of a way of life that less than 10% of our population actually enjoys and they now want it.

As a society we've become entitled, lazy and complacnet while the ROW has developed the work ethic we had last century!

If we are seeing oil at 62$ now and price of resources increase this much, can you imagine the impact of 1 or 2 billion people more on demand and prices!!! America can barely supply itself with materials and energy, why would the exporters keep on cheaply supplying it when they could keep it for themselves?

Right now, they know they need us. They're using our capital and know how but once they get it they'll do whateve it takes to suck us dry. Heck, that's what we've been doing and labeling it democracy! And just look at China, they're not working with our profits model. They're working on cash flow. They're not even publishing truthful numbers and they're not letting their currency float. Why do you think they are doing this? Ironically, the world is making all kinds of investment decisions based on bad data!

Did you know that US banks, with its axecess capital is now buying significant positions in Chinese banks? Did you know that a HUGE percentage of the loans on their books are delinquent (because they've been working on cash flow and not profits)? The Chinese financial system can not go down without causing pain to the US banking system!

If we don't accomodate them in some sort of way, political tension is bound to increase. We are already seeing signs of this creeping up.

I don't want to lose my quality of life anymore than any of you, I don't want the sky to fall but the first signs of reality are hitting us in the face and many are in denial.

I just want people to wake up and focus on what is important in life. Drastic rises in real estate are good for no one but the flippers and the downgraders. Large and quick real estate increases create huge economic and social dislocations. And the number one sign of this is that while house prices have doubled in the last few years, net worth has barely budged!

Mar 3, 2006, 6:10:00 AM  
Anonymous Anonymous said...

"They're using our capital and know how but once they get it they'll do whateve it takes to suck us dry."

Thank you Danielle, now I understand...the CHINESE want my house. But will that drive prices up or down?

Mar 3, 2006, 7:25:00 AM  
Blogger marine_explorer said...

The Chinese financial system can not go down without causing pain to the US banking system!

And, quite possibly: severly restricting the happy-go-lucky, credit-driven spending lifestyle of the American consumer.

Mar 3, 2006, 9:36:00 AM  
Anonymous Anonymous said...

Again, history repeats itself. The Chinese don't play fair, don't float their currency, etc., etc.

Sounds a bit like that previous "yellow peril", the Japanese. Remember them? They were going to buy every last high rise and golf course (and the entire state of Hawaii) in America in the late 80s. They had a protective corporate culture that was in bed with the Japanese government and placed stiff tariffs on imports. We thought the world was "turning Japanese" and it didn't.

The only things we should be doing with China is insisting on a floating currency and match tariffs and quotas, or eliminate them entirely. Oh, and push the democracy thing (although democracy is not a prerequisite of any of our other trading partners). Let market forces take care of the rest and let the chips fall where they may.

Japan did not take over the world and I doubt China will either.

Mar 3, 2006, 11:38:00 AM  

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