‘Speculators Have Disappeared Off The Face Of The Earth’
The News Press reports on the WCI numbers in Florida. “Bonita Springs-based WCI Communities said Wednesday that orders for its condominium towers have screeched almost to a halt, and businessmen across Lee County said the residential construction industry as a whole is slowing dramatically.”
“‘We are backing down on the tower business, we can’t offer the incentives or financially motivate people’ to buy, said CEO Jerry Starkey. Total new orders were down 62.4 percent, but towers were down 82.6 percent to $57 million, and the number of units ordered fell 88.8 percent.”
“‘We don’t think the bottom is here yet, we think the bottom is six months away,’ said Ed Bonkowski, a Fort Myers-based real estate broker who said he represents $25 million from investors. ‘The sellers of property are in denial right now that they’re not going to lose money on their deals, and they will. The main thrust is the speculators: They have completely disappeared off the face of the Earth.’”
“The signs are everywhere that the downturn is taking place throughout the industry. ‘The answer is an unequivocal yes,’ said Rad Hazen, (who) provides landscaping plants for builders locally and around Florida. ‘It’s statewide. Almost everybody is saying there’s a downturn in major projects. A lot of the business seems to have dropped off.’”
“Underlying the doldrums, said real estate broker John McWilliams, is the huge 2005 run-up in prices that came to an abrupt end early this year. ‘All day, every day I’ve been in price-reduction meetings with the sellers,’ many with lots or houses in Lehigh Acres, he said. Sellers are finally coming to their senses, McWilliams said. ‘The obstinance is over with the sellers who didn’t want to believe this.’”
“The numbers bear out the coming hard times, said Lee Building Association VP Michael Reitmann, who notes ‘new permits (have) slowed quite dramatically.’ Only the strong will survive, he predicted. ‘It’s going to affect those people who are not good businesspeople and aren’t watching very closely what they’re doing. The days of just being order takers in the residential market are over,’ he said.”
The Naples News. “Once one of the hottest places in the country for real estate, Southwest Florida has turned into one of the slowest markets for WCI communities. ‘Active adult (communities) in Florida was the largest decline,’ Starkey said. ‘The east coast of Florida is down, but less so than the west coast. West coast continues to be the weakest of all areas.’”
“The company also saw a spike, almost a doubling, of cancellations, up to 30 percent from about 15 percent. The decline is causing the company to look at cost-cutting measures, including recently announced layoffs. ‘It continues to be a tough environment. We don’t know if it will continue for three quarters or seven or eight quarters,’ Starkey said.”
“Other builders in the area are feeling the same pains. Last year, Mercedes Homes sold more than 300 homes. This year, said Lisa Perry, VP of sales, ‘I would like to see 175. We are pushing for that. With the investor influx we had in the last two years, it was great for sales then, but now we’re competing with our own inventory,’ Perry said.”
“A market correction to some extent was in order because the pace of the last couple of years was unsustainable, said Alan Foster, of Divco Construction. His company builds primarily high-end single-family homes and even that segment is feeling the impact of investors dumping homes. ‘We are competing against homes that we sold to investors before,’ Foster said.”
“Any market segment where there was speculative building is now facing hardships, said Mark Raudenbush, a general contractor. ‘It’s reverse musical chairs. Anyone left holding a chair when the music stops is the loser because they have a chair they couldn’t sell,’ Raudenbush said.”
Related links:
‘The housing market slowdown is having an effect, said Michelle Martin, owner of Sheribel Furniture in Bonita Springs. ‘Yes, we’re hanging in there by a thread,’ she said. ‘Business is just really, really off.’ ‘When a store brings in zero sales for four days straight, you have to realize something is wrong.’
‘Home and condominium prices rebounded in Manatee County during July, though sales continued at, in the case of condos, half the pace of the same month in July (2005). There were 508 single-family homes sold in the county during July, down about 38 percent from the same month in 2005, while condominium sales shrank slightly more than 49 percent.’
I got a new post up!
http://www.housingbubblecasualty.com
SoCalMtgGuy
Socal, further to your post of today, I will call this post “OZ Faith”
Everyone at this blog does a good job of pointing out how warped fundamentals are- especially regarding housing/debt/earnings/inflation etc. But there seems to be this “faith” that there will be a coming correction (Macro-wise, not just in housing) based on classic fundamentals. I propose that there is no such guarantee that “fundamentals” can remedy these imbalances. How can this be?
If I was to get in the ring with Mike Tyson, I agree, the “fundamentals” of such a bout would put me on the ground in 2 seconds. But if the fundamentals of such a bout could be manipulated- perhaps Tyson was handcuffed or ill or I simply brought a gun into the ring- the outcome would be drastically different.
The problem is herein.
If fundamentals can be actively manipulated- how can one assume that said fundamentals (or historic fundamentals) will remedy a particular problem. There is no longer any “fundamental” in the economy that is free from “non-free-market-influence”- especially govt influence. This was not always the case. There was a time when a bubble could inflate and burst and an economy grow and contract- free from arbitrary influence.
This is no longer the case. Yet, people here continue to insist that fundamentals will correct the current imbalances we face.
Steven Roach seems to be the greatest believer in Oz Faith. Somehow he came around a couple months ago to the idea that the Powers That Be will take care of everything (i.e. manipulate the fundamentals accordingly to level out current imbalances).
My challenge to the bloggers here would be to give me a economic fundamental that is free from influence (by govt, corps, FED)- If one can not, then by default there is an admission that reliance of historical fundamentals to correct current imbalances is based on the Powers that Be having the skills to solve the issues we currently face.
So on one hand, everyone here seems to realize how much the Powers that Be have screwed up, but on the other hand somehow these PTB are going to fix these problems? I do not see any evidence to suggest that they can (or will).
Tuesday was a great display of the Glory of fundamentals and how they are manipulated. Of all the fundamentals in an economy- would not the cost of money be the single most important element to be freely traded? Even beyond supply/demand principles. The cost of money is the number 1 element that should be market driven. Yet, the people of the US do not question this- “It’s just that way” “That’s how it works” etc etc……
No doubt, there are big changes coming to our economy, I am just saying that those changes will not necessarily be based upon “fundamentals” as is being defined in this blog.
You’ve misinterpreted the argument. No one thinks the PTB will ‘fix’ anything, but rather that the market will correct itself, and an increasingly impotent Fed will be unable to stay those market forces. A primary fundamental is that trees don’t grow to the sky, and a temporary credit glut doesn’t deny or alter that fundamental; it will necessarily reassert itself at some point, and that moment is upon us.
LM,
Even gravity can only be ignored as a “fundamental” for so long. If this is a case for “continued appreciation” or a “soft landing” I believe that for all of the plunge protection team antics we’re already seeing a hard landing in the works.
I agree with what everyone is saying- My main point is: Fundamentals (true free market fundamentals) did not take us to where we are today. Thus, I think it is a mistake to count on fundamentals (that are able to be manipulated) to take is to tomorrow.
I do not know where we will be tomorrow- but I do know it certainly will not be decided in a free market.
No, “fundamentals” did not take us to where they are today; no more than “fundamentals” brought about the Florida Land Bust of 1929 or the Great Depression.
Therein lies the rub.
As earlier written by another poster, you can no more ignore fundamentals than you can ignore the force of gravity, the sunshine or the orbits of the planets.
The runup in Real Estate was frenzy driven, unnatural, unprecedented in history, and unsustainable.
Remember: For every action, there is an opposite and equal reaction. It may take time, but everything in Nature seeks equilibrium….that includes the markets, the weather, and your health.
We will see a return to sustainable, affordable housing prices very soon. Anyone thinking otherwise is just wishing.
When was there ever a market that was free from some kind of manipulation (either over or under the proverbial counter)? The government has always controlled (or at least tried to) the money supply—it’s their job to do so. How well they do it is a matter of argument, but the fact that they do it doesn’t make the market any more or less “free”.
LM - We are here because the PTB ignored the fundamentals and tried to manipulate our way out of a situation where we needed to return to the fundamentals. You can only do that for so long….That’s why they are fundamentals.
Fundamental means ‘of the foundation’. When you move away from the foundation, things become shaky.
The further one moves from the fundamentals, the more it will be decided in a free market.
The government has always controlled (or at least tried to) the money supply—it’s their job to do so.
Not it’s not. There’s the big problem.
I agree with what everyone is saying- My main point is: Fundamentals (true free market fundamentals) did not take us to where we are today. Thus, I think it is a mistake to count on fundamentals (that are able to be manipulated) to take is to tomorrow.
I do not know where we will be tomorrow- but I do know it certainly will not be decided in a free market.
____________________________________________________
I think you’re confusing one manipulation with another. Think of the economy as a rubber band. The fundamentals are that the rubberband wants to be in a relzed state. The Fed stretched it, it takes energy to do that, they get the temporary energy to do that via liquiidty, but at some point the liquidity gets exhausted (true savings gets depleted and servicing the debt exceeds income) and fundamentals take over again and the rubberband relaxes again. The Fedis out of moves at the moment. They’ve shot all their bullets that make the false economy that masks the real economy. There is no permanent ‘play’ the Fed can do to keep things in a state of unreality forever, they can only keep that up for 15, 20 years, (which seems like forever for most people and gets them saying ‘this time it’s different’). It’s never different. Game over.
Exactly chicote……but trying to explain that to this crowd is useless….. They prefer to focus on the sneeze instead of the virus.
“All the perplexities, confusion, and distress in America arise, not from defects in the Constitution or Confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.”
President John Adams
“There was a time when a bubble could inflate and burst and an economy grow and contract- free from arbitrary influence.”
Never happened. There were always market maniplations ongoing, through the use of force, wars, money supply, etc. The idea that there was a time without “undue influence” is simply not the case.
You make a cogent point about what the next type of manipulation will be . . . something will be tried, but the stronger argument that there will be a reversion to mean, is compelling. People compare the current housing bubble with the tech stock bubble for good reason. It was based on mania as much as anything, not on market manipulation (although that it was present as well).
Remember tulips? Me neither, but I’ve read about it. Eventually people simply didn’t believe that tulips were as valuable. They didn’t believe PETS.com would ever make them money, and soon, they’ll know that there’s no burried treasure under their houses.
As to your question: Will the government try to do something that none of us can contemplate to manipulate and game the market. Answer: probably. Will it work? Answer: Do you want to buy my tulips. They’re only $1 million dollars each.
God help us if fundamentals fail to do their job here.
Think of all the things that humans have manipulated or interfered with to try to change the natural order of things. How many have proven successfull? How many more ended up in outright disaster?
No one on this blog denies the existence blatant manipultion or meddling on the part of the PTB. But this isn’t the first time in our history that the PTB have meddled, manipulated, and coerced markets. So, if the argument here is fundamentals have to be thrown out due to human interference, then I say go back to the cases where the PTB did interfere, find the outcome, establish a pattern, and now you’ve got a fundamental to place your bets on.
Our economic course over time does sharer many aspects of those who have come and gone in the past. None of them ended good (ie The Roman Empire)
Look, you cannot change a basic law of physics. For every action, there is an equal but opposite reaction.
The PPT, or PTB, or whatever you want to call them can attempt to transfer one bubble to another, or prolong the bubble, but they cannot prevent a bubble from bursting. Never have and never will.
You’ve framed the argument to favor your proposed outcome. Good for you. You have a place in the world of spin. But spin is not reality.
The ‘PTB’ indeed do have significant influence on the markets. However, it is not universal, enduring, or correctly applied. This influence also ALWAYS has unintended consequences.
The PTB flushed the market with liquidity after 2000 to avoid a deep recession. It is my understanding that this money was intended for use primarily by business. Instead, it went largly into another asset bubble and produced nothing except for consumption. More folly for the US economy.
With regard to your challenge, “Give me a economic fundamental that is free from influence,” it’s an unfair challenge. The PTB set monetary policy, therefore influence all fundamentals to some degree or another. The economy is intertwined and interdepentant. All arguments could be simply debunked using economicspeak. Once again it does not make it a reality.
My challenge to you: give me a economic fundamental that is free from the weather (or greed, or fear).
You give the Powers That Be far too much credit. If they were that good, why would they have lead us to the edge in the first place?
LM - A very articulate contribution. My only addition would be to say that I sense that you perceive governmental/corporate/monetary interference to be in some way aberrant from “true fundamentals” (although perhaps I’m reading too much into your piece). That being said, I vaguely recall way back in grad school that in discussing macroeconomic policy, we went into great depth discussing the essentially political nature of the Fed, the different global economic players attempting to influence US monetary policy, and their explicit and vested interests. I think we are in agreement that monetary policy is a function of politics; where we may disagree is that there was some golden age when the market acted in the absence of government involvement. Not only coinage, but standardized weights and measures, and some rudimentary form of contract enforcement, are essential to create a market in the first place. A free market without government involvement is no more possible than a free market without people. I suppose that this is my way of saying that in the end, that everything is a “fundamental,” including wild gyrations of monetary and fiscal policy.
Yes Dupont- you are correct…one point I was trying to make was the blanket use of the term “fundamental” that gets thrown around so much today…….
Good point. Government manipulation of rates/currencies/monetary creation will cause substantially serious pain. Eventually we will be back on a gold standard and a free market for money. As Keynes once said: “In the long run, we’re all dead.” Well, the long run is here now and some of us are alive John Maynard!
Oz Faith is a story yet told. The monkeys are still flying and witch still has her broom - but a little clean water can do wonders. The current crop of market manipulators see themselves as above the historical norm - that never existed, never will as history rewrites itself daily. I see our ecomony as simply more macro (larger in all senses) and while the end game can be delayed, it cannot be eliminated. This is like earthquake fault science - a lot of crap going on, a lot of noise, but in a time unknown San Francisco will be destroyed.
Monetary “interference”?
This is not interference, this is total control. Money is controlled by a private institution.
There is no free market. Not even close.
It is not TOTAL control. If it were, then the Fed would have directed the extra M3 where it wished, instead of into housing. If it were total control, the Fed would have an “out”. they do not.
It is interference at best. There are free market forces, impeded by governmental/Fed interference. That interference tries to be control, but fails miserably.
You have a choice of where you spend your money. The Fed does not control this. It may influence or interfere but hardly control.
Clouseau.
The laws of fluid dynamics still apply in man made lakes. Free markets can exist but when you dump a truckload of dye in the lake it affects everything.
The Jolly Green giant is about to take a leak in our artificial paradise.
The fed is flying a jumbo jet with throttle and elevator, but no ailerons or rudder, and are now running out of fuel.
The Green Giant is the pilot and he just ate a bunch of asparagus.
LM — the three fundamentals of my housing life:
1. My income;
2. My rent;
3. The cost to buy and “avoid rent.”
And of course, estimates of the future values for each. Therin lies the origin of the bubble.
LM:
an interesting post.
But I think you are confusing the word “fundamental”.
Sometimes we don’t even know what the “fundamental” really is, we can just partially characterize it by observation. The fundamental may be altered by external stimulus, but that does not change the fundamental, just the observed outcome. the fundamental is still present.
My analogy:
A meth addict.
The fundamental rule with humans is that we must sleep. Hence, the observed action of humans is that we tend to sleep at least one stretch lasting a few hours, on average every 24 hours.
this is fundamental to living.
However, I as a doctor routinely stay up for 36 and 48 hours. I have thus self-influenced the fundamental need for sleep. However, as consequence for going against the fundamental rule, I do not react as well on hours 36-48 compared to the first 12 hours being awake. The fundamental law holds, even though the observation of outcome is slightly altered.
If I become a meth head, then I could easily stay up and function for 3-6 days at a time. So the outward observation is that the fundamentals are no longer applicable. However, after 5-6 days or so the fundamental reasserts itself, and I will “Crash” for several days. The fundamental rules ALWAYS applied, but external influence altered the oberved behavior for a SHORT time. No matter how much meth you take though, the fundamental remains.
There are very rare cases of a disease where the brain “turns itself on” and cannot sleep. these people all become delusional within about 1 week. And they die within 2-4 weeks.. the fundamental is intact.
Same with the economy. There are certain fundamental forces that work within the economy. We do not fully grasp what exactly they are. we can observe them at play time and time again, and start to partially understand them though.
Our current govt/PPT/Fed etc has exerted influence on the fundamentals. That can change SHORT-TERM (which may be years) the observable outcome. But it can’t change the fundamentals. Eventually, the manipulation can not be maintained, and fundamentals will reassert.
The thing is, this manipulation can go on for weeks, months, years, even decades. Where are we on this curve? Who knows. But it does appear that the manipulation is losing it’s effect, hence the “conundrum”. The conundrum is partly due to fundamentals reasserting themselves over exogenous influence.
Good post.
Clouseau
LET ME CLEAR THIS UP A BIT……
The fundamental of “income property” is to collect more in rent than you are paying for mortgage/taxes/insurance/etc.
MOST people I know that have bought property in the past 5 years are losing at least $800-$1000 a month when you figure in all expenses including taxes (some are more).
Sure, some of these people have had lots of ‘appreciation’ that makes losing money each month ‘worth it’.
Once the fundamentals return, people will get quick sick of losing money every month without having the ‘get rich quick’ appreciation.
The government doesn’t have to do a thing…when people start losing money, the fundamentals will return. People will quit overpaying for property they can’t rent anywhere near their costs.
Paying 180 times the future earnings of a company worked for a little while…but then people started losing money, and the fundamental valuations of companies returned.
Either way…what a great thread this became. Feel free to post these comments over on my blog.
SoCalMtgGuy
http://www.housingbubblecasualty.com
We said all this last year and now it has come true! Open your eyes moron - in 6 months it will WORSE!!!
Good article you may want to post Ben.
http://www.businessweek.com/investor/content/aug2006/pi20060810_284614.htm?chan=top+news_top+news
“Many industry observers are concerned that the default rate could reach dangerous economic proportions. Government-sponsored enterprises (GSEs), such as Fannie Mae (FNM) and Freddie Mac (FRE), as well as lenders such as Countrywide Financial (CFC) and Wells Fargo (WFC), are all looking at foreclosure prevention strategies, according to Sharga. “The GSEs and lenders are developing novel solutions on workout programs to prevent people from going into foreclosure,” he says. “Because if the number of foreclosures is too great, it drives down the market and they find themselves stuck with a lot of depreciating property on their hands. It is much more in their interest to educate homeowners on what their options are and come up with ways to help them keep their homes.”
“foreclosure prevention strategies” makes it sound warm and fuzzy, i bet those brainstorm sessions are sponsored by rolaids, pepto-bismol, mylanta, maalox, and tums.
Bernanke has already floated one strategy. Allow an “emergency” increase in the allowable size of the GSE’s portfolios and allow GSE’s to hold out-of-the-money debt, which could be sold off later if market conditions allow.
Translation: government bailout. If interest rates float too high, the government will use GSE’s to subsidize below market mortgages rates to prevent interest rates from resetting so high that it leads to mass defaults and possibly systemic risk.
in fact, this is already happening in Europe. You can get mortgages at rates that are too good to be true … and I’m sure this will continue for some time to come, simply because if the lenders (ultimately the ECB) don’t offer mortgages at these artificially low rates the housing market will crater (in my country, home prices are at least 500% above the historical trendline; in some other EU countries it is not much different).
First post here. Been lurking for a while. I thought things were out of control in 2001. Sold my house in L.A. and have been renting ever since. Seems I was a bit too early.
Forclosure prevention strategies is not a new concept.
http://www.bartleby.com/65/ho/HomeOwne.html
“Homeowners Loan Corp
(HOLC), former U.S. government agency established in 1933 to help stabilize real estate that had depreciated during the depression and to refinance the urban mortgage debt. It granted long-term mortgage loans to some 1 million homeowners facing loss of their property. The HOLC ceased its lending activities in June, 1936, by the terms of the Home Owners’ Loan Act.”
FDR’s remarks.
http://www.presidency.ucsb.edu/ws/index.php?pid=14665
“IN SIGNING the “Home Owners Loan Act of 1933,” I feel that we have taken another important step toward the ending of deflation which was rapidly depriving many millions of farm and home owners from the title and equity to their property.
The Act extends the same principle of relief to home owners as we have already extended to farm owners. Furthermore, the Act extends this relief not only to people who have borrowed money on their homes but also to their mortgage creditors.
It will, of course, take a little while to set up the machinery necessary to carry the principles of the Act into effect. In the meantime, I appeal to mortgage creditors and all others who have claims against home owners and ask them, until full opportunity has been given to make effective the refinancing provisions of the Home Mortgage Act, that they abstain from bringing foreclosure proceedings and that they abstain from seeking to dispossess the home owners who are in debt to them.
Cooperation between the officials of the Home Owners Loan Corporation, the mortgagor and the mortgagees during the next few months will make many foreclosures unnecessary and will do substantial justice to all parties concerned.”
So the PTB will, without a doubt, step in again. The question, as always, is when and how effectively. When they do, many people who still have their homes will be able to keep them. The heloc spigot is a different story. Much more difficult to turn that back on. And that alone will be cause enough for unprecedented systemic risk. Remember that scene from Das Boot when the rivets started to pop from the seams beacuse of the water pressure? You ain’t seen nothing yet.
A future fable you might like.
http://www.mtgprofessor.com/A%20-%20Purchasing%20a%20House/home_owners_loan_corporation_ii_-_a_fable.htm
Good post , thanks .
“‘We don’t think the bottom is here yet, we think the bottom is six months away,’
Six months? I think Ed needs a history lesson.
Hey Nnvmtgbrkr, Do you have any intel from the incline village market? Anecdotal stories or stats? Thanks
I haven’t been watching Incline too closely as of late, nor have I conducted any biz up there recently, so my stories are limited. I know, like the rest of our area, it’s dead. Like Ben’s previous thread brings out, second home market, which is what most of Tahoe is, has dropped off the map. There will always be those with “silly money” buying up there. You know, the type that buy the 3mil lake front home and bulldoze it to build the house they want. That happens a lot in Incline, where most of Tahoe’s upper crust reside. But the Lake has all the free standing inventory it can handle right now, and it’s not moving. Lots of price reductions in the mid to lower range as well.
Friend of ours is a realtor in S Lake Tahoe….. he has not sold one house this year. Good thing he is also a dealer in the casinos at night, otherwise he would have no income.
All my loan officers, except one, have taken second jobs now. I give them credit for not waiting for economic disaster to be looming before they made a move. Although at least one of them is in so deep I don’t think a 3rd or 4th job would help. That’s what happens when you make six figures for the first time in your life and then expect it to continue indefinitely.
Hard lessons learned indeed….
Thanks for the insight!
I would so love it if he were actually right… unfortunately, I think he’s going to be saying this exact same phrase again, and again, and again….
As would I. My perfect scenario is to blow this thing up and start anew. Let’s get back to making money the old-fashioned way. Kind of the ripping the band-aid off quickly, rather than slowly, scenario. Unfortunatly, these things just don’t work that way.
didn’t bb throw the hb a bone ?
deflation is illegal in our debtor country
Great article today on the financial sense site.
http://www.financialsense.com/Market/wrapup.htm
The following excerpt sums it up nicely:
“One of the sources for rising consumer debt has come from home-owners taking out home equity lines of credit (HELOC) to extract equity from their home. The increase in home equity extraction has lead to a negative U.S. consumer saving’s rate, with lower-income homeowners seeing the largest decline in their savings rate over the past couple of years. Renters currently have a 3% savings rate, homeowners with no HELOC have a 0% savings rate, and homeowners with a HELOC have a NEGATIVE 16% savings rate.”
So much for the theory that renters are the fools and that the specuvestors and Homeowners that used their houses as ATM’s are prudent savers.
That’s a great site. Excellant way to tap into some sharp minds.
So much for homeowners being more mature.
0% savings rate for the smarter homeowners…
-16% with a HELOC?!? Holy crap. That figure 11 in your link is scary!
This tells me the homeowner population is just hanging on… Oh, this could get ugly fast.
All of those retailers scrambling to get toys over here for Christmas might be wise to not push so hard for the toys… (The WSJ had an article on how the factories in China cannot get all of the dirt cheap labor they normally do for the Christmas rush.)
Ugh… Not what I wanted. Cest la vie. I just wanted sane home prices, not what I’m seeing coming down the economic pipeline.
Neil
The thing that I find interesting is that the Homeowers WITH NO HELOC have a lower savings rate than renters. After all to some extant splitting HELOCers from non HELOCers separates out the most profligate.
I really don’t understand that statement about homeowners with no HELOC having a 0% savings rate. Is that the general trend? I guarantee you I have better than a 0% savings rate.
excellent article, thanks very much for the link
I thought that the builders in Florida didn’t sell to investors?
I have a theory. Whenever someone buys a house as an “investment”, they think they are one of the only few people doing so. Therefore, they think that “fundamentals” rather than investors are driving the market.
They are surprised to find out that the majority of the market were investors just like them. They only find out when it’s too late.
Question: Are there still lots of “greater fools” roaming around Florida looking for homes to buy as “investments”?
The only “GFs” I know who recently purchased in Florida are families looking for homes and being convinced that housing will at worst just flatten out for a while.
I was starting to look myself for an investment… I have done some low ball offers to what the fundamentals are… 20% down 30yrs mortgage plus RE tax, insurance, and maintenance will equal a 6% return with the rent obtained. I will not touch anything that the numbers will not work.
—AL
= o properties in that range
try 08
i totally agree… thats why the low ball offer’s =)
Don’t know about Florida, but Specuvestor activity in DFW (Dallas Fort Worth) is alive and well. Had a conversation with a fellow (about 25) a couple of days ago and he informed me the whole DFW market would go up 50% within one year. It turns out he is a flipper…had 10 houses currently. He says the market here is so undervalued that up is the only direction. When I asked him if he remembered the 80’s bust here (I was ordering appraisals on REO for the RTC (FSLIC) in 89-91), he just looked at me blankly and said ‘what happened then? Hard lessons will be learned….this will make the 80’s in DFW look like childs play….and it was bad then.
Rob — that probably applies much of the time. I watched it apply big-scale in central Florida in 1970-72. Because of the arrival of Disney, developers started building hotels like crazy. The local governments loved it and did not care how many wanted in. None of the hotels seemed to check on how many other rooms were being constructed. Even if it were not for the disastrous oil embargo of 1973, many of these hotels were destined to hurt for years to come, due to over-building. I think greed is the money version of being horny. Tends to put blinders on. Makes you agree to things you later regret.
OT… a friend of mine stated that his RE agents said it was a buyers market in Florida… my question is does anyone have a true definition what makes a “buyers market”? I just don’t think a buyers market is more homes for sale than buyers…
—thanks AL
Well, I can say that when the affordability index is at a 20 year LOW, it most certainly is NOT a buyers market. Here in Florida over 90% of the residents cannot affors the median home, with almost a $200,000 afordability gap.
Anyone that studied simple statistics knows that a reversion to the mean equals a huge drop in prices- from here- somewhere in the order of another 30% or so. We are still so far out of whack with any sort of normal prices it is silly to even utter a “buyers’ market.”
Just as the pundits claimed in prior bubbles that it was “different this time” or that there would be a “soft landing”, it is not different and in only 1 out of 10 times inthe last 50 years has there been a soft landing. There needs to be alot - and I mean ALOT - of pain and suffering to wipe out the excess prior to a buyer’s market to take place. We still have some 2 trillion in resets to deal with along with a whole host of other economic and geopolitical issues that need to play out. I look to 2008-2009 for a bottom at the earliest.
“Any market segment where there was speculative building is now facing hardships, said Mark Raudenbush, a general contractor. ‘It’s reverse musical chairs. Anyone left holding a chair when the music stops is the loser because they have a chair they couldn’t sell,’ Raudenbush said.”
Hey, Mark, when the music stopped, all the chairs got creamed, not just the last one standing. Also, every market was speculative…when Boise has a run up in prices similar to Tampa, the whole country is in panic mode. Watch for the Last week in August, 2006 is the real estate dot.com crash, with total capitulation from the 4 month old listings that haven’t sold
David cee, Im worried the people watching the people and chairs get wacked will have the building fall in on them!
I hear yea… I’m on your side… what is scary is that this friend is a RE appraiser in Florida, but he has never seen a down market being in it for 3 yrs,,, I just wanted some hard text to back up what we on this blog know a buyers market is…
—AL
3 years. Too many in the industry either have no experience (having weathered a downturn) or they just have a short term memory.
Taking 97-98 as a base year, reversion to the mean says about 50% off the average, and more like 60-70% off the inflated asking prices of today. Long time coming.
Yeah the “Buyers Market” phrase is the latest gimmick in the realtors handbook. Oh now that there is a crap load of inventory and nothing is moving it must be a buyers market. The funny thing is right after they tell you it is a buyers market they will say you better buy now while you have lots choices. A buyers market is where fundamentals return and all the newbie realtors go back to there former occupation of laying on there back. We are at least two years away from bottom and six months away from half price lap dances.
depends on the way you look at it. IMO florida is certainly a buyers market , in that buyers now have the upper hand. You will not pay top dollar. You can bide your time. There is plenty to look at. In other words it is better to be a buyer right now than it is to be a seller. It is the buyer in control now , not the seller.
This does not mean that , because in these respects it is a buyers market, that buyers will get a good deal. If you define a buyers market to be one where buyers will get bargain real estate , or even good value , then no , we’re a long way from a buyers market.
Huck Finn,
I’ve felt that way for awhile. Even here in Oregon. It’s a buyers market in the regard that I’m a potential buyer, but I’m electing to play horse shoes and listen to the ball game on the radio. If I do attend an “open house” it’s for our further entertainment and to witness shoddy contruction first hand (not to seriously consider tendering an offer). Good point.
Somebody said it here before but I’ll paraphrase because I liked their response. The term Buyers market reflects relative negotiation power compared to the seller.
Sellers Market: people bid over asking price, waive all contingencies and inspections, write letters pleading for the house with pictures of their families and promise to feed the squirrels.
Buyers Market- Homes sit on the market with tons of inventory, buyers include tons of contingencies to wiggle out of the deal, offers are significantly lower than asking prices, and if someone asks the buyer to feed the squirrels they laugh in their face.
The relative negotiating power makes it a buyers market or sellers maket. A buyers market isn’t neccesarily a smart time to buy, and a sellers market isn’t neccesarily a good time to sell.
Nice reply. Concise.
So it all comes down to who is feeding the squirrels. It makes perfect sense now.
I totally disagree.
A buyer’s market is when an asset trades beneath its intrinsic value.
A sellers’s market is when an asset trades above its intrinsic value.
Imagine that there are five houses for sale on a street, each with an intrinsic value of $200K. A year ago, a couple of people sold them similar houses for $400K. But now, these five houses are on sale for between $350K and $380K, and the sellers can be talked down another 10%…. but there are no buyers in sight.
That’s still a SELLER’S market.
When the price dips below $200K come back and tell me that it’s a buyer’s market.
Relative negotiating power or intrinsic value. I think whole housing market is smoke and mirrors.
I know that as the housing market slows down that it will leave a lot of people without jobs. Please correct me if I am wrong in my thinking, if the economy grows by adding workers or increasing productivity then when we lose jobs from real estate we will see a double hit on the economy because of the job loss and the fact that most of those jobs i.e. realtors never increased productivity in the first place. So if those individuals never went into real estate they could have been in a productive line of work. So at the point where the real estate market leaves behind fundamentals it becomes one big ponzi scheme.
Bingo!!! Buyers’ markets shouldn’t be defined by inventory availability without reference to price.
When the cost to buy approximates the cost to rent, we’ll have a neutral market. When its cheaper to buy than to rent, then we’ll have a buyers’ market.
I could give a rats ass about great supply. I want great prices.
You’re free to re-define terms as you use them. It’s perfectly reasonable to scornfully point out that like “alternative music” the words that are applied to the definitions as used aren’t accurately descriptive of the definitions as used. However these terms as used have meaning and are consistant. If you don’t like “buyers market” what term would YOU use to describe a period of rising inventory when there are more sellers than buyers and doward pressure on prices? Keep in mind that whether prices are going up or down does not in itself indicate whether prices are high or low relative to the mean.
It is still a sellers market when house prices are still well above affordability.
Greenlander — I don’t think there is such a thing as “intrinsic” value — especially in the real estate market, there is only what something will sell for. Example: A lovely house in a higher neighborhood in New Orleans one week before and one week after Katrina. Even if the house itself is untouched and undamaged, the value has changed drastically because of a number of exogenous variables related to Katrina — schools, police and fire protection, the cost of insurance, social stability, the availability of jobs, etc. Not even the cost of inputs (land, materials, labor) is a guide to “intrinsic” value if other variables don’t support it. You can buy a three bedroom house in Flint Michigan for virtually free these days — significantly less than it probably cost to build — because there is no local economy to hold up even a land/labor/materials valuation. Another classic example: Housing in Love Canal. If there is no buyer, the intrinsic value of an object is zero.
Dupontguy39 & jdd:
There *is* such a thing as intrinsic value.
There’s three ways to value real estate:
1. Rental rates (cap rate in investor lingo) from converting it to a rental
2. Replacement cost. (How much would it cost to acquire the land and build it)
3. How much you can sell it for.
In a fair and efficient market, all three of these values would be equal. That value is the intrinsic/fair value of the house.
Right now, #1 and #2 are way out of whack with #3.
Remember, homebuilders were making a tidy profit back in 1999 building houses before this whole thing ran up. Construction costs and rents have increased with inflation, but not like sale prices have.
Greenlander’s right, I posted a three legged stool analogy over a year ago here, back when anonymous postings were still allowed.
Greenlander nailed it.
I don’t think the concept of intrinsic value has much meaning in that context.
The value is what you could sell it for. There is no other “price.” A home is not, generally, a commodity. So, at best, a price not involving a transfer of that asset is just a guess. Until you have an offer to buy or sell, you don’t even having a starting point. If you cannot find someone to agree to that price, then your price is wrong.
I think the market, assuming a buyer/seller dichotomy, is obviously a buyers’ market.
Not that the amount of leverage and disparity won’t increase - it will. And there seems to be some issue of sellers actually recognizing the weakness of their position - hence the high inventories. Sellers could drop their prices 25% and inventories would drop big time. Their failure to do so may result in their dropping their prices 40% after carrying the asset another 12-18 months.
If I was an “investor” then I’d do whatever I had to do to liquidate the position. If I was a home owner in over my head, I’d do the same. If I didn’t like my home, I’d do the same thing. Anyone else, probably should just de-list the house and recognize the fact that they will be living there for a while.
It’s a crashing market. If it walks like a duck and quacks like a duck, it’s a duck. Please have the intelligence to call it what it is.
buyers market?
I agree with most of what everyone has to say above; however, I think we are in a “suckers market.”
…meaning you are a sucker if you believe David Lareah and buy thinking you are getting a deal when builders reduce prices by 5-10 percent, or offer to pay closing costs, or no payments for 6 months, or some other gimmick that maintains prices at or near the current level.
A buyers market will come after all the suckers have bought. After these buyers are gone, there will be full fledge capitulation by sellers and prices will plummet to 99/2000 levels or worse.
IMHO the bottom will be 10% below 1994 prices. The credit bubble clearly started in 1994 and by 1995 the asset bubbles were well underway. To the best of my knowledge burst bubbles not only go back to the mean but exceed on the downside by 10 to 15%. Art ,Equities, Bonds, Housing are just a few of the current bubble markets. The bubble is just starting to burst and will be lengthy and painful. It took 12+ years to get to this ridiculous point - do not expect this to be over in 1 to 2 years.
IMHO the bottom will be 10% below 1994 prices.
My thoughts exactly. I have begun to wonder if prices couldn’t drift even lower though, given unfavorable demographic trends, globalization forces, etc.
Forget the above thread. Just because people don’t like the definition of the term, doesn’t mean they can change it:
buyer’s market - A market which has more sellers than buyers. Low prices result from this excess of supply over demand. also called soft market. opposite of seller’s market.
http://www.investorwords.com/641/buyers_market.html
Just because the prices still don’t make sense does not change the fact that it is a buyer’s market. Yes, real estate agents are using the term to push property, but they are just taking advantage of the fact that most people don’t know what the term means. They think it means “a good deal for the buyer” (such as a lot of people on this board who say that it is not a “buyer’s market”) rather than that it means that there are more people selling than buying.
Speculators has not disappeared. They are right there with their FOR SALE signs. The GF’s have disappeared and the music has stopped. The party is over!
Yup they’re in the market, but they’re screaming to get out.
From a developer’s standpoint, speculators have disappeared because they are not buying.
They just haven’t looked in the mirror lately. If they’ve started construction on spec….
I listened to the WCI conference call yesterday and they were talking about their stock being undervalued and the market was over estimating the depth of the downturn. HUH!??! They stated that the last 12 months was not idicitave of the future (ie land and other potential writedowns). HUH!?!?! They also stated they will be agressive buyers of their stock at these levels. Good luck you blind fools! How do these clowns get to this level of success - Oh I know - Professional Liars!!
Ken Lay said the same things to his shareholders all the way down to ZERO. Nuff said.
‘All day, every day I’ve been in price-reduction meetings with the sellers,’ many with lots or houses in Lehigh Acres, he said. Sellers are finally coming to their senses, McWilliams said. ‘The obstinance is over with the sellers who didn’t want to believe this.’”
This sounds like music to my ears.
Let’s see
The market goes Up through Optimism-Excitement-Thrill-Euphoria And then turns down on-Anxiety-Denial-fear-Desperation- Leading to: Panic-Capitulation-despondency, and then back on the up to
Depression-Hope-Relief-Optimism.
This says we’ve exited Denial and are starting to enter Fear.
I’ll buy in Capitualiation (I assume there will be more selection than during Despondency). Now how long to go these 3 extra steps? I expect 2007 to be Fear into Desperation with Christmas 2007 being the start of Panic. Thus… We won’t have full Capitualation until Summer 2008 (at the earliest, probably later).
The true bottom, Despondency, might not be until 2010.
Neil
capitulation is the court house steps
absent some Event, it can be 5 years from capitulation to despondency (e.g. 1991-1996). better to sell early — and buy a bit late in the cycle.
Hmm. I dunno. I still think it’s possible the economy could pull some kind of hat trick or Bush could emit some presidential emergency decree like one requiring all citizens to purchase a home pronto, before 2006 is over.
NOT!
Just a thought:
~69% of Americans own a home
26% of Americans are too close to the poverty line (or below it) and are thus locked out of credit markets and ineligible to buy a house.
40% of Americans own a 2nd home.
No… I don’t think this is going to be ugly… not at all. 110% home ownership + rentals…. How the @$%^ is 5% to 6% of the population expected to buy enough homes to matter?!? We converted 15% of the population from renters to “owners” in less than six years! Think about that. Normally, 20% of the population is of the means to buy a house but isn’t… now it is 5% or 6% “sitting on the sidelines” with at least triple that number in quiet desperation wishing they hadn’t bought.
This will happen faster than ever before. I’m not expecting a slow decline. Not once this avalance starts.
And yes, I realize a good chunk of the owners are equity locusts whom own empty properties in other states. I’ll buy before they’ve rebuilt their credit enough to compete.
I see enough vacant flipper owned homes where I want to buy! 
:) 
Don’t worry, I’ll wait two years (maybe longer).
Neil
“One of the sources for rising consumer debt has come from home-owners taking out home equity lines of credit (HELOC) to extract equity from their home.”
Let’s go back to the early 1980s. Prior to that time, all consumer interest was tax deductable, but the variety of tax advantaged savings vehicles we have now didn’t exist. The personal savings rate was an “awful” 8 percent.
So, to encourage “savings and investment,” all these tax advantaged savings vehicles have been created, beginning with the 401K, and all interest was made taxable, except mortgage interest and (this one has gone back and forth a few times) student loans.
With this shift in incentives, teh savings rate has — DROPPED TO ZERO? Either the theory was wrong, or they should have closed the last loophole.
Correct me of I’m wrong but I think the savings rate calculation used in the article does not include tax deferred investments like 401ks, so you may actually have it backwards. The zero savings rate could indicate that more people are investing in these tax deferred vehicles rather than traditional savings methods…lets hope so. Does anyone have any statistics/first hand knowledge of people during the 90s that borrowed from their 401ks to buy stocks and got creamed on both sides when their 401k and the stocks went to crap? That will give a good indication what is going to go down with all these so called “investors” that used HELCOs to buy one house after another. I know the answer is they are F’d but I’m interested in how the market absorbed the losses.
Larry L,
This is where it ALL started! This is where everyone began putting their revolving debt and and auto loans (which were no longer deductible) against their homes! That set the stage. Once we made the 500K cap gains exemption there was NO turning back! Btw, when you can make 500K in tax free money who the hell needs SAVINGS!
I think its time for someone to roll out that most exquisite
“… southwest Florida is working off a whole new paradigm…” quote! C’mon- give it to me! GIVE IT TO ME!
“South Florida,” he said, ”is working off of a totally new economic model than any of us have ever experienced in the past” according to a realtor who predicted that a land shortage will support higher prices indefinitely.”
- New York Times, Trading Places: Real Estate Instead of Dot-Coms, 3/25/05
got his email- we need to hit this dude
YESSSSSS!!!!
This was often the favorite quote on FC (now sadly passed).
It’s a new paradigm, and everybody who doesn’t buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.
Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.
This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.
I think that your particular quote is an excerpt from the excellent but not defunct blog:
There is no housing bubble
It was the BEST satire on the whole bubble. It fooled OC Register’s writers and a couple of bubble bloggers.
Man I miss that site.
Ha..ha…ha! Ha..ha…ha!
Now, every subscriber to this blog can say, “we told you so.”
For me a buyers market is when it would be more expensive to rent but people can’t get loans because they don’t qualify for mortgages due to lending standards.
Yes real estate will take a POUNDING. to consider this a ‘buyers’ market is foolish. That would assume it is a good time to buy. This is just to BEGINNING OF THE DOWNTURN! A fool buys now. There are too many people with the attitude that they will ‘jump in’ on the deals coming. You know it is a good time to buy when the mindset is that real estate is a bad investment. There is a long ways to go before that is the general attitude.
I don’t think speculators have dissappeared… just that the realitor/devloper industry has renamed the category to ‘2nd home buyer’.
soon to be renamed ‘2nd home seller’.
‘We don’t think the bottom is here yet, we think the bottom is six months away,’
… or rather, the end of the beginning of the descent towards the bottom is maybe around six months away .
Anybody have the link to today’s WSJ article, “Homeowners Start to Feel The Pain of Rising Rates”? It’s very well done as they interview several FB’s.
http://online.wsj.com/article/SB115517452814031758.html?mod=hps_us_inside_today
fair use quote:
Luisa Cordova-Holmes was looking to lower her monthly payments when she refinanced her $312,000 mortgage in 2004. Instead, she wound up digging herself into a ditch.
For their new loan, Ms. Cordova-Holmes and her husband chose a so-called option adjustable-rate mortgage, which carried an introductory rate of 2.35% and gave her multiple payment choices each month. “I had a lot of financial obligations,” says Ms. Cordova-Holmes, an accountant who lives near Detroit.
Two years later, however, the interest rate on her loan has jumped to 8.75%, her loan balance has climbed to $324,000 and her minimum monthly payment has risen to $2,257. She says the terms of the loan weren’t clearly spelled out.
Oh boy… this is happening to many of my coworkers. Wait until mid to late 2007 when most people will be feeling their resets.
Neil
An accountant? Not somebody I’d want to hire to do MY books, I’ll tell you.
Fantastic!!!!!!!!!!!!! Bubbles are for bathtubs. You’d laugh if it was so tragic. Here a single building. A single G#$ D%&&*%%^ building in Miami with over 30 Condos priced over 1Millionon the market simultaneously:
http://www.condoflip.com/the_bath_club/the_bath_club.asp
You think this ends well?
Aptly named. Someone’s going to take a bath! I like the one listing for $10.5M. $1,846 sq/ft, $4,300 mo. in fees. 1/3 of the condos for sale in the building have been on the mkt. for over 6 mos. Monitarily speaking, possible the nicest roach motel on earth!
Has somebody told these peope that Miami isn’t Manhattan? 1806 is$3,750,000 and it’s “decorator ready”=unfinished? 1/3d of the units are for sale? Somebody’s gonna be in PAIN.
Great thread, fascinating. Getting back to manipulation preventing fundementals from working. Why did the Fed turn the 2000 market crash into another bubble (housing)? Was it to get GWB elected again? Does the Fed have a need/desire to step in this time? What could possibly be done to prevent a housing bust? The affordability disconnect in housing is something that would take some HUGE manipulation to correct. Seems the only way for the Fed/Gov to prevent a housing bust would be to somehow raise wages big time and/or keep the perception going that RE never goes down. I don’t think that can happen.
The 2000 market crash was not prevented or lessened. The Fed did what is was able to do, diversion/make a different bubble.
The housing bubble is doomed. The big question should be that given manipulation has occurred and is occuring what will the next bubble be? Manipulation or fundamentals, either way money has got to flow somewhere.
WCI, wasn’t that the builder stock Cramer recommended you load up on at $20. Said it once before on this blog, but just can’t help myself again. Traded down to $14.84 today. What a Putz!!
“The main thrust is the speculators: They have completely disappeared off the face of the Earth.”
for Americans the world usually seems to end at the US border …
the housing bubble in most other regions of the world is alive and kicking, and in Old Europe it has come back with a vengeance after being a bit asleep for some years. Housing speculators are partying again in many EU countries because the credit spigots are still wide open and despite rising ECB rates and rising inventories of unsold homes, it’s easier and cheaper than ever to get a home loan. Central banks (and politicians) have made clear that they are going to save the FB’s by printing even more money and inventing even more housing subsidies, tax incentives etc. As long as this Ponzi scheme lasts the worldwide housing/credit bubble is NOT over.
And when it starts (in Europe there is not even a remote sign of that happening), I expect the downslide in (real, not nominal) home prices to last for at least 5-10 years.
I recently saw a breakdown for Treaury purchases made by foreign investors. China and Japan both slack off slightly but there was a large increase made from the Carribean. Can’t vouch for the reliability of the data but it makes you wonder if some U.S Central Bank funded Hedgies are doing some buying to keep our credit markets afloat. The dollar and all dollar denominated assets (which includes housing) are on borrowed time….
Yep, we beat that to death a while ago.
You can find it in the filing cabinet under X with the (active) Plunge Protection team.
My opinion is maybe or maybe not but you and I will never know.
For the record:
The Personal Savings Rate is calculated as follows.
Source: http://www.bea.gov/bea/newsrelarchive/2006/pi0606.htm
Disposable Personal Income (DPI) [minus - ] Personal Outlays (PO)
DPI is the sum of the following
1) Wage and salary disbursement
2) Supplements to wages and salaries (including employer contributions for employee pension and insurance funds, and employer contributions for government social insurance)
3) Proprietors’ income with inventory valuation and capital consumption adjustments
4) Rental income
5) Personal income receipts on assets (including interest and dividend income)
6) Personal current transfer receipts, including government social benefits, disability and health insurance benefits, and unemployment insurance)
From which the following is subtracted:
1) Subtract personal contributions for governmental social insurance
2) Subtract personal current taxes
PO is the sum of the following:
1) Personal consumption expenditures (durable goods, nondurable goods, and services)
2) Personal interest payments (non-mortgage interest paid by households)
3) Personal current transfer payments to government and rest of world
The best article on Personal Savings Rate is here: http://tinyurl.com/jchc7
- B.C.
The speculators haven’t dissappeared, they are the ones who are trying to sell their properties now.
Duh.
Ok, let’s say it…what all of us on the downside of the market have been waiting to hear.
POP!
Speculators have only disappeared because they have morphed into a mass of landlords leading lives of quiet desperation while waiting for price appreciation to resume…
It’s a fools market. You need to be a certifiable fool to participate.