Saturday, May 05, 2007

Charting the Real Future

I found this chart over at the Bubble Buster site. I added the green, red, and orange lines to the chart. The red line interpolates the inflation-adjusted (real) property price minima, the green line projects the expected decline in the real inflation-adjusted price, and the orange line projects their intersection to the price ordinate.

I'll save you the effort of doing the math... it's a 35% drop in real prices over about seven to eight years.

What I find interesting about this chart is that it looks like the normal cyclical peak was trying to form back in 2003-04. But it got forestalled thanks to Greenspan, the flooding of the money supply, practically nonexistent short-term interest rates, relaxed (comatose?) lending standards, and paid liars like David Lereah.

And I don't blame you if you don't want to wait seven years to buy. But if you do buy now, plan to hold on to that property for at least 15 years before expecting to see a real profit. That's not even taking into consideration the costs of "ownership" (maintenance, taxes, insurance, etc.) all of which will add years before you can sell for a real profit. And if it's your primary residence that you are thinking of buying? Well, don't plan on moving or having to sell due to sickness, divorce, job transfer, etc., etc. for the next decade and a half. Frankly, I can think of better things to put my money into for the next 15 years. But that's just me. Of course, this housing bust is unlike any other and it may be over much more quickly if there are job losses, a big increase in interest rates, etc.

And this chart is worth thinking about with respect to the one above:

27 Comments:

Anonymous Anonymous said...


What I find interesting about this chart is that it looks like the normal cyclical peak was trying to form back in 2003-04.

Good observation.

this housing bust is unlike any other and it may be over much more quickly if there are job losses, a big increase in interest rates, etc.


Bingo, This is my bet. The rest of the economy does not look good.

May 5, 2007, 12:22:00 PM  
Anonymous Anonymous said...

This chart makes one error, it assumes that inflation will always occure. This is not historicly correct. Inflation has been a constant since only 1938. prior that time there were long periods of deflation, from 1873-1893 for example. Don't forget Japan, prices have been deflating since 1991, in spite of their central bank. Home prices may not return to this level in our lifetime.

May 5, 2007, 12:32:00 PM  
Blogger Lisa said...

When I sold in '04, I thought the top had to be that year. Prices were just so insane. But no, the ARM/IO sheeple madness went on another year & a half.

Once voodoo financing and dreams of riches disappear, I absolutely think prices will start some serious declines. And considering CA's last downturn was four years to the bottom, I think this will be longer and worse.

Just about everyone I know is leveraged to the gills. If they had any idea prices would be flat or decline, I doubt any of them would have taken on massive amounts of mortgage debt or HELOC'd their equity away.

May 5, 2007, 8:36:00 PM  
Anonymous Anonymous said...

Oh the charts, the charts Marinite… Do you have to spoil the RE machine’s day by posting those dang charts all the time? I mean, c’mon….. Didn’t you know the trees and sky are colored different here and details like this price vs reality stuff is for morons and poor people?

On a more serious note, another very telling chart is the price of homes vs incomes and vs rents, which are the real factors that will determine home prices in the end.

As I’ve said (and these charts show)..

35-40% haircut in Marin
50% haircut elsewhere

Bank on it…
Matt..

May 6, 2007, 6:44:00 AM  
Anonymous Anonymous said...

I think this chart makes another serious error. It assumes that the inflation curve is linear, which is very far from the truth. In fact, a constant rate of appreciation (say 2%) is not a linear graph, but a parabola (ie exponential). This is why most stock chartists prefer to graph linear trendlines on logarithmic scale graphs, and not on linear like this one.

May 6, 2007, 8:32:00 AM  
Anonymous Anonymous said...

"I think this chart makes another serious error. It assumes that the inflation curve is linear..."

Wrong. For each data point the author uses the rate of inflation at that point. If the infation trend is a slight curve then fine, it doesn't matter as it is represented in the final graph. Marinite just eyeballed a straight line through the minima which is a perfectly legitimate thing to do. Probably a very slightly curving line would provide a better fit but the resulting fit would not differ much at all from a line. The estimate of where prices are going to most likely decline to would not change significantly.

I think you are, for whatever reason, desparate to discredit this obviously devastating (to the bulls) graph.

May 6, 2007, 1:06:00 PM  
Blogger vfsv said...

Our charts aren't quite as professional-looking but we posted Santa Clara County data showing what figures to happen just before prices roll over.
"Up" Zips at:
http://www.viewfromsiliconvalley.com/id325.html

"Median $ Value" (All Homes)
http://www.viewfromsiliconvalley.com/id326.html

coming soon are "Median $ Value" (Resale Homes) & then similar data based on averages instead of medians.

We hope you like it!

Thanks!

May 6, 2007, 7:18:00 PM  
Anonymous Anonymous said...

The sad part about this is that even if the 'best' thing were to happen, and prices were to come down say the projected 35-40%, what would that mean? 450-500k for a small house? last time I consulted my personal "money ritcher scale", 500k was still A TON of money. You 'might' be able to then squeeze into something, but you'd still be eating peanut butter and jelly sandwiches every night for dinner. whoopee!

and in regards to this comment:

"Once voodoo financing and dreams of riches disappear, I absolutely think prices will start some serious declines. And considering CA's last downturn was four years to the bottom, I think this will be longer and worse."

Virtually every single homeowner I talk to 'thinks' that A: prices will not go down at all, but admit that they have stalled, and B: the downturn will only last a year.

I have to really bite my lip when I hear this.

May 7, 2007, 8:39:00 AM  
Anonymous Anonymous said...

Excellent analysis - I agree that prices must and should come down significantly.

But my observations agree completely with the previous comment - it seems like all owners in SF and Marin only grudgingly accept that prices have leveled out. They don't seem to fathom that prices could actually decline and they do expect them to begin increasing again soon.

Time will tell - but I think the capitulation phase of this cycle is going to take a while.

May 7, 2007, 8:58:00 AM  
Anonymous rdm said...

Prices can only stay flat or rise if enough houses are being sold to keep the supply of houses for sale from rising. It really is the basic economics of supply and demand. If there are more choices for those buyers in the market there will be a built in need for sellers, that need to sell, to lower their prices in order to move "the product". Granted there is some pent up demand, my self included, from people who want to buy. Some of this demand, myself not included, will only wait for a small reduction or more choices to buy. This may be what is currently supporting, such as it is, the market. Clearly the speculation if not gone is severely weakened as a force to artificially inflate prices. Clearly there is some change in the psychology of the housing market from bull to bear. Clearly the credit market is tightening and people are now beginning to see that they need to be able to fund their mortgages and not rely on inflating prices to make their purchase work financially. Really all that is supporting the market is the attitude that Marin is so very very special that owing a house is worth a price that imprisons the new owner as housing debtor for the rest of their lives.

May 7, 2007, 9:38:00 AM  
Anonymous Anonymous said...

These people in Marin with all their money and all their paradise. They are about to receive the biggest haircut of their lives. They will be singin' the blues.

And That's The Name of That Tune..

You can take that to The Bank..

Matt..

May 7, 2007, 10:21:00 AM  
Anonymous marinite said...

Now that Lereah is leaving the NAR, he is completely changing his tune vis his outlook for housing:

http://tinyurl.com/3cg4af

Some choice quotes:

"We're in a real estate recession," said David Lereah, chief economist for the National Association of Realtors, who surprised many this week when he announced he would leave the Chicago-based trade group on May 19. "I'm projecting the first [nationwide] price drop since the Great Depression," he said. "We're going to have negative home prices in 2007."

In characteristic cheerleader style he demurred when asked whether he ever felt pressure from within NAR to skew forecasts in a positive direction."You'll have to talk to me about that in two or three weeks," Lereah said. "I work for NAR now."


Lemme guess: once he is officialy no longer getting paid by the NAR he will be publishing a book on "Why Now is a Great Time to Rent: How to Avoide the Coming Real Estate Crash".

What an a-hole.

May 7, 2007, 10:33:00 AM  
Blogger Circus Act said...

Good point about interest rates being a wild card in the housing market. CNN reported this morning that China, which owns a $1.2 trillion portfolio of US treasuries that average 4% and is growing by $1.5 billion per day, has created a new agency headed by Lou Jiwei, a Finance Ministry official. The new agency will be investing China's huge surplus cash reserves. According to Credit Suisse analyst, Dong Tao, China could easily seek to double its return, which would still be less than the return from many global funds, and the incremental return would be equal to China's entire education budget. If China does begin moving away from US Treasuries, it's unlikely that the US could attract enough investment at 4% to keep feeding our budget deficit. Only by making the return on Treasuries sweeter could we entice investment from other sources. Moving back to federal budget surpluses and paying down the national debt would certainly help to keep interest rates down but this won't happen with our current administration.

On a side note, the Orange County Register has an interactive map that shows the ratio of prime to subprime loans in each California county. I couldn't find the source of the information but the map shows the following for Marin:
Subprime mortgages: $231,305,000
Prime mortgages: $3,020,606,000

Here's the link:
http://www.ocregister.com/ocregister/sections/money/subprime/

May 7, 2007, 11:14:00 AM  
Anonymous Anonymous said...

Another gauge I am using to judge what the local SF and Bay Area markets might do is to measure the level of inventory, sales stats, and price appreciation in certain "hot" relo states and cities.

States like NC and TX have been getting record numbers of CA and East Coast transplants. Of these, the vast majority only do so after cashing out their overpriced homes.

In the last 6 months- or about the approximate time that the realization of a faltering market hit the mainstream, sales have been off, prices have been stagnating or even coming down, and the inventory in some areas is growing at a ra[id rate.

The cause and effect of the supply of out of staters ripe with cash-out money drying up is very tell-tale. Just by simple mathematics, one can deduce that a lack of buyers in relo states equals bad real estate performance in feeder states such as CA, NY, MA, FL, etc etc. This is all the more perplexing due to the fact that these relo states are still insanely affordable.

That alone makes me wonder exactly how much money people actually extract from their homes in the form of profit and if people who bought in the last 5 years are really making much more than someone who simply saved by renting. If a supply of buyers dries up for properties costing $150k and less makes it seem that this might be the case.

So far, the inventory in relo states has grown as much as 40% in some extreme areas. Once again- more proof that the slowdown is nationwide. Ironically, the first places hit are those places that were fueled by ex-patriots, and despite having highly advantageous pricing, are still doing badly.

It just comes to show how incredibly fragile the RE system has been.

May 7, 2007, 11:24:00 AM  
Anonymous Anonymous said...

I couldn't find the source of the information but the map shows the following for Marin:
Subprime mortgages: $231,305,000
Prime mortgages: $3,020,606,000

Here's the link:
http://www.ocregister.com/ocregister/sections/money/


Now that's Interesting!

Marin County is BY FAR lower in subprime loans than any area in the state. In fact, Marin is THE LOWEST of ANY county over 15,000 population.

Compare Marin's rate of only 8% subprime loans to Sonoma County at 20%, Contra Costa at 24% or Los Angeles at 28%.

I guess you could say things really are DIFFERENT here!

May 7, 2007, 2:13:00 PM  
Anonymous Anonymous said...

And yet the Marin market is tanking. Go figure.

May 7, 2007, 5:05:00 PM  
Blogger Matthew said...

Well, I was afraid of this, but it's probably better this way.. Another post by some sorry SOB w/my name at the end of it.. That's correct, the below post (posted at 10:21 am today) was the second fraud perpetrated on this board by some immature punk. Oh well, I'll sign in hence force to avoid this moronic little game..

Here are several clues why the last fraudulent post a day or so ago and this one below was not me..

1. It's ignorant and immature. (Of course, the author may think my posts are as well, but, well, he’s wrong. I just post market observations and my opinions and would never refer to Marin residents as “richies.)
2. There are misspells and improper use of capitalization.
3. The author has serious issues. I suspect he is probably a new Realtor or sub-prime lender and has too much time on his hands with the ongoing crashing market… business must be slow..

Either way, kiss my backside Mr and crawl back into your hole.. I’ll sign in from now on..

For Marinite, don’t know if you can block an email sender, but suggest checking out the author of the below and cut his sorry backside off, or encourage him to be a man and post under his own name.


"Anonymous said...
These people in Marin with all their money and all their paradise. They are about to receive the biggest haircut of their lives. They will be singin' the blues.

And That's The Name of That Tune..

You can take that to The Bank..

Matt..

5/07/2007 10:21:00 AM "


Matt..

May 7, 2007, 6:10:00 PM  
Blogger Marinite said...

Well, I was afraid of this, but it's probably better this way.. Another post by some sorry SOB w/my name at the end of it..

Yes, we have some immature realtor trolls who like to play games like this. It's nothing new. We have not been bothered by them for many months now and the pattern seems to be that they come out during the spring selling season. Maybe they are feeling bad this time of year for during the last two springs in Marin the RE market has not been doing all that great and so maybe they need to vent against the "nonbelievers" to help their faltering professional self-esteem. If they had the capacity to discuss things in a more rational way, with facts and data, then I would not have a problem with them in general.

It's ironic because the Vision RE folks and two others were hitting me up by email to join my blog in the sense that they wanted me to list them as a "favored agent" status or something in the links margin of my blog. If you can't beat them, join them sort of thing I guess.

So anyway, you now have to be registered with Blogger to post a comment. Sorry about this but these days I am so busy that I don't have the time nor dor I any longer have the patience to deal with adult children. (The alternative is for all comments to be submitted for my review before being published and I don't want to do that.) I expect there will be more crying as the overall RE scene worsens and I don't want to have to deal with cry babies.

May 7, 2007, 6:33:00 PM  
Blogger fortunateone said...

" Marin County is BY FAR lower in subprime loans than any area in the state. In fact, Marin is THE LOWEST of ANY county over 15,000 population.

Compare Marin's rate of only 8% subprime loans to Sonoma County at 20%, Contra Costa at 24% or Los Angeles at 28%."


I agree, that is ineresting. Sounds like Marin may escape the big price reductions just as it did in the last downturn.

May 7, 2007, 10:25:00 PM  
Blogger Matthew said...

Marinite..

Thanks, and sorry to you (and the other bloggers) for you having to make this change..

Okay, back on subject here..

The subprime data for Marin is noted.. That certainly will keep prices stickier here than most places and it's not a surprise (generally) given the wealth in this area; however, I know of a dozen people who bought in the last 4-5 years who are borderline Alt-A and subprime, so we'll just have to see this one play out. You know where my money is....

There are tons of stretched households out there right now unfortunately, and that's just one of the problems with this bubble. There are tons of others, but that's just one of the more obvious.

The most telling new article recently on all of this to me is the enormous increase in consumer debt disclosed today. I expect some of this is due to the tax man, but this is yet another ominous sign of things to come IMO.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aqtIdPiqht4w

Matt..

May 7, 2007, 11:00:00 PM  
Blogger J at IHB and HFF said...

I will not predict anything about Marin but I posted about the mistake of fixating on subprimes when they are only the posterboy du jour for massive overleveraging under a wide array of guises and financial instruments.

May 8, 2007, 4:15:00 AM  
Blogger Circus Act said...

Matt pointed out the growth in consumer credit this quarter. Here's the link to the actual Fed release.

http://www.federalreserve.gov/releases/g19/current/g19.htm

Do any of you economist types know what formula is used to calculate the seasonally adjusted data?

May 8, 2007, 10:23:00 AM  
Blogger hopeforusall said...

Inflation...consistent...count on it, if good ol George keeps having the Fed printing out notes at the rate he's going to pay for his war. Inflation will never go away.
Arthur

May 8, 2007, 1:55:00 PM  
Blogger Holland said...

Has anyone noticed one of the headline news on CNN.com for today?

"Home-price forecast: First ever decline
National Association of Realtors cuts 2007 forecast; would mark first drop since it began tracking values in 1968."

Will Marin be so special that prices here won't decline? I think that is just some people's wishful thinking. Recently I have noticed a lot of price reductions offered by sellers in Marin.

May 8, 2007, 4:07:00 PM  
Blogger J at IHB and HFF said...

“Will Marin be so special that prices here won't decline?”

It depends on if you can deactivate Marin’s forcefield by locating its Achilles’ heel:

http://tinyurl.com/2xu3ur

May 8, 2007, 5:22:00 PM  
Blogger fortunateone said...

Well, you know where prices go, is still, and always will be, somebody's best guess.

My best guess is in Marin average to above average quality properties will decline 20% to 30% off their highs. Maybe more of a decline for POS properties that shouldn't have been there in the first place.

To me, a decline is a normal part of the cyclical market that real estate is.

While it may not be popular on this blog, I believe Marin will not be hit nearly as hard as markets where speculation and subprime loans were the norm.

May 8, 2007, 6:57:00 PM  
Blogger Marinite said...

Here is the reply from the author of the top graph with regards to the criticism that he should have used a logarithmic scale:

While it is correct that linear trendlines are typically for simple linear data sets (I think this is what the blogger is trying to say), it is actually best used when something is increasing or decreasing at a steady rate. And this is what real estate historically has done over the long haul. The reason a linear trendline works in our example (yours and mine) is because we're not trying to predict what the next quarter or year will bring, but rather what is the "right price". Once the market falls below the trendline then it will be time to buy again. Make no mistake I don't think real estate will simply hit the trendline and then continue a simple rate (e.g. 3%). Rather I believe real estate will likely once again become cheap (in the far future) and fall well below the trendline as it has done in the past.


The blogger instead is trying to stat that I (or you) should use a exponential trendline. This simply is incorrect. An exponential trendline is used when data values rise or fall at increasingly higher rates, which is very rarely the case for real estate, stock markets, etc. Rather these trendlines are more commonly used to illustrate things such as a decreasing amount of carbon 14 in an object as it ages.


The blogger could have been on track had he said to use a polynominal trendline. These trendlines are very good for short term analysis and can be used to project the coming quarter or year. But since I'm (and you) more concerned about the common years (plural) or decade I chose to use a trendline that is more accurate for a longer period.

May 16, 2007, 7:54:00 PM  

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