‘A Market In Unparalled Uncertainty’
Kelley Bennett writes at the Voice of San Diego.org. “There are neat charts of data. There are historic accounts and industry predictions. And then there’s emotion. That psychology is what many real estate analysts consider the ‘x-factor,’ the part of the market that can’t be logically graphed and analyzed. It’s hard to predict what people will do especially in a market that finds itself in unparalleled uncertainty.”
“James Hughes, at Rutgers University, said the psychological and emotional factors involved in real estate have gone in cycles, depending on whether the market was up or down. But the psychology is always there. ‘We used to call recessions ‘panics,’ he said. ‘We didn’t have a fancy word to describe them. The switch goes from greed to fear to greed to fear.’”
“And, with as much media focus on the real estate market as ever, experts say psychology will continue to play a role going forward. ‘It feels like a bigger thing than it really is,’ said local real estate analyst Gary London said. ‘Now the question is, ‘How long and how deep?’ We’re no longer asking ourselves, ‘Is the market down?’, we’re now asking ourselves, ‘How down, and for how long?’”
“But it takes more than one person getting greedy or scared to turn the entire market. Herd mentality, even when rooted in economic reality, forms the foundation for most dramatic market shifts. And now, homebuyers are a lot more cautious about getting on the train, said Alan Gin, professor of economics at the University of San Diego.”
“‘It could conceivably work in the other direction,’ he said. ‘Buyers keep hearing this talk about a bubble, about housing prices slowing. Buyers might just decide that they’re going to wait, possibly make lowball offers.’”
“‘People are swapping worst-case scenarios at cocktail parties,’ London said. ‘That’s bound to add to the psychological cloud.’”
“Norm Bour has been in real estate for 25 years and he said he hears from sellers all the time who can’t seem to sell their homes. ‘I tell them, ‘It doesn’t matter how much you paid for it, you just need to take a loss, lick your wounds and move on with your life,’ he said. ‘They need to realize that their house is not going to sell for more than the most recent comparable sale.’”
From the Daily Bulletin. “The CAR has changed its (affordability) methodology because of changes in the mortgage finance landscape. The new report assesses affordability only for first-time buyers, and says 23 percent of first-timers can afford a median-priced home in the state. That’s better than the 14 percent overall affordability in CAR’s final index under the old methodology.”
“But some are questioning whether the new index actually says very much. ‘This new report looks like they’re jockeying the numbers,’ said Bill Velto, manager of Tarbell Realtors in Upland. ‘They’re basing it on a 10 percent down payment, and close to 80 percent of first-time buyers are going the 100 percent financing route.’”
“The study assumes an adjustable interest rate of 6.48 percent and a 10 percent down payment, leaving buyers with an income requirement of $98,700 and a monthly payment (including taxes and insurance) of $3,290. ‘That’s a ridiculous number,’ Velto said. ‘Very few first-time buyers can afford $3,290 a month.’”
“Some of those who thought they could apparently can’t. Foreclosures jumped by 48 percent in San Bernardino County.”
“Regional economist Jack Kyser of the L.A. County Economic Development Corp. said both reports indicated a softening in the housing market. ‘Affordability of 23 percent is not terrible for first-time buyers, and the numbers are better inland,’ he said. ‘The real question is what will happen in both these areas as prices come down some.’”
“‘A lot of people got into the market with adjustable-rate mortgages,’ Kyser said. ‘They jumped to get in because they thought prices would keep climbing to the sky. Now whether they can stay in depends on their financial strength. I think there’s going to be some suffering in the next year or two.’”
“‘It could conceivably work in the other direction,’ he said. ‘Buyers keep hearing this talk about a bubble, about housing prices slowing. Buyers might just decide that they’re going to wait, possibly make lowball offers.’”
If Dr. Gin reads today’s Wall Street Journal, he will discover just how low lowball offers can get. We are not talking about 10% or 20% off the list price, but rather more like no offers within striking distance of the initial list price, and ultimate sale prices at 50% of the initial list price. My guess is that historically large price reductions off seller’s initial expectations are currently in progress, with more on the way, as buyers wake up to the fact that nobody except for the super-rich can afford to buy homes at current price levels.
We see here none of the economists have acknowledged the existence of a ponzi scheme. Instead, they are washing their hands declaring force majeure on all their past blatherings, rationalizations, and general cheerleading — it was the x-factor that ruined our beautiful models! Not that it was mathematically untenable to begin with. No, we were all duped by Keynes’ Animal Spirits. Please continue to believe us when we find the next parade to jump in front of.
I took an econ class at Univ. of Wash. Seattle with a young PhD student. He was sharp as a whip with solving book problems but had no clue about the markets. I actually had to teach him what ’shorting’ meant. And, how all of this seeming prosperity here was created by easy money and borrowing. He didn’t seem to get it though, so I moved on.
J K Galbraith “got it,” and was reviled by the mainstream of the economics profession for sharing his insights with the masses.
“j.k. galbraith “‘got it’.”
are you kidding??? i suspect we’d all be living in le corbusier designed ’suburbs’ (like the under class in france) with cement furniture bolted to the floor. please expand on your affinity for jkg.
“J K Galbraith “got it,” and was reviled…”
“…are you kidding???…etc…please expand on your affinity for jkg.”
Perfect. Do you guys work together often?
I recently read one of J.K. Galbraith’s novels, “A Tenured Professor.” The hero becomes ultrawealthy by using a computer model to short stocks during the irrationally exuberant eighties.
However I didn’t feel the book quite “got it”. Based on this novel, you would get the impression that all you have to do is identify overvalued stocks and you will become a billionaire. It did not really acknowledge the importance of timing, or the idea that a mania could continue long after it was obvious to any rational person.
I feel a sense of deja vu so apologies if I have posted this exact comment before.
Here’s the WSJ article GetStucco mentioned (I think), if anyone’s curious:
http://www.moneyweb.co.za/shares/international_news/949690.htm
Read “A Short History of Financial Euphoria” before you continue to cast aspersions on a recently-deceased great whose ideas will outlive those of the vast majority of his many critics.
I have seen and experienced this too. My company was taken over by a large prestigious multi-national, and they wanted to remake us in their own mould. The management was ‘the best and brightest’ with plenty of academic credentials. Four years after they purchased us, we lost 50% of our market share. They then sold us to a group of private investors for a big loss. The educated dumb ass is not limited to the field of economics.
- Ditto. I used to work at company called Hughes Aircraft.
Then someone bought us called General Motors. No more company.
Hughes was my first job out of college. I put the blame on C Michael Armstrong. He later went to AT&T and engineered that company out of existance as well.
Me too. HAC ‘77-’86. Was private before being sold to GM.
I actually hired in at Culver City. It was a great experience from 1980 - 1990. Hughes was a great research and development company. GM made Lead Sleds.
Worked in El Segundo. I never had a prayer of buying a house in any areas west of the 405, or even in the SFV. Interesting, even back then a lot of the aero/def companies had a hard time hiring mid-level managers w/ families due to expensive housing. A lot of younger, single, just out of college engineers came to work there. Most of that group who were from out of state said their plan was to work and party there for about 5 years, and then bail. New hires that had gone to college in CA, like me, were more likely to stay. Eventually, I bailed when I felt that aero/def was going to eat it beginning in the late ’80s early 90’s. Looks like that was a good move on my part in hindsight.
Just to echo your thought, notice that Robert Shiller — Ph.D. from MIT — can solve stochastic differential equations with the best of them. However, he follows the influence of his wife ( a psychologist ) in predicting a wave of price depreciation caused by herd mentality. Don’t listen to the mathematicians here — the market is driven by psychology.
??? His analysis was quite mathematical, and didn’t require a whole lot of psych at all:
http://www.flickr.com/photos/28622918@N00/21708038/
In fact the brilliance of his analysis was that it was dispassionate and did not leave a lot of room for interpretation.
A customer holding a spec house priced at 425k got an offer for 325k.
Another guy holding a spec house got an offer which would have made him 10k. He turned it down.
cocktail parties? what parties?
stock up the tap ramen
Plus the 2 buck Chuck.
…and open that can of spam.
Soup lines a’comin.
I wish someone would invite me to one of these cocktails parties…
I would enjoy watching a speculator mix alcohol w/ depression. (I know, I’m sick)
I think that going long on sin fund types of companies will be a good investment.
FBs gotta have their smokes and liquor.
You want to be in the fund VICE (catchy name).
When I sold my house I stuck my $ in Schwab. I just got invited to “This Special Event” (Investment Seminar) “Dinner will be served”- Bring it on!
that is my point.. when was the last time anyone held a cocktail party? Certainly NOT if they need to count their pennies… oy vey
Tap beer with Top Ramen? Mmmmmm…
here is a sakastic take on the car from
patrik.net
http://patrick.net/wp/?p=285
Sarcasm yes, but also genuine anger in some of the posts.
“But some are questioning whether the new index actually says very much. ‘This new report looks like they’re jockeying the numbers,’ said Bill Velto, manager of Tarbell Realtors in Upland. ‘They’re basing it on a 10 percent down payment, and close to 80 percent of first-time buyers are going the 100 percent financing route.’”
These affordability numbers simply add to the confusion to the question of what percentage of households can currently afford to purchase a home. Does anyone buy an $800K McMansion with a 10% downpayment, other than a few Californians who did not spend all the equity out of their previous home? If few are buying homes with 10% down, then what does the affordability index tell us?
The main problem is that the affordability index confounds the percent of households are able to purchase a home in a lending environment which has abandoned prudent underwriting standards with the percentage who will be able to continue paying the mortgage until they either repay the loan or move elsewhere. Generally speaking, any affordability index which does not seperate the question of purchase ability from long-term affordability will understate the percentage of households able to purchase a home and overstate the percentage which can afford to purchase a home. This is especially true when the lending industry seems to have collectively decided that it does not matter whether the loans they make are ever repaid.
Good point but your post was about 2 paragraphs too long to make it in the MSM.
“The study assumes an adjustable interest rate of 6.48 percent and a 10 percent down payment, leaving buyers with an income requirement of $98,700 and a monthly payment (including taxes and insurance) of $3,290.
Sheesh, how can anyone consider paying these clowns a dime with they spew such tripe? A $3300 mortgage for a first timer (or anyone?!) linked to an ARM is affordable and sound? In our area (Oregon), a realtor is counciling buyers on the value of buying in a “transitional market” (i.e., NOW) rather than the uncertainty of “waiting for the bottom.” These clowns have all the credibility of the tobacco companies.
I think that the California Association or Realtors should do standup. Their new numbers are hysterically funny.
wunderbar
‘We used to call recessions ‘panics,’ he said. ‘We didn’t have a fancy word to describe them. The switch goes from greed to fear to greed to fear.’
- It’s different here in So Ca
David Lereah’s already booked for my neighbor’s bar mitzvah.
“I think there’s going to be some suffering in the next year or two.’”
Thank you, Oh Magnificent Buddha, for you infinite wisdom…
fear leads to anger
anger leads to hate
hate leads to suffering
-Yoda
suffering leads to fear - one big circle
Well, the bad news has finally hit the cocktail circuit. Not long ago, the cocktail circuit was abuzz with all the money people were making on their flips. But, I still have not heard people gagging real estate. I want to hear “i will never bet on RE again.”
That will be a good sign that it is time to buy
GetStucco-Agree, but I want to hear it universally, and lots of dry-heaving.
I still hear some permabulls boasting at parties that there is still a ton of money to be made in RE and just wait until spring 07 for everything to bounce back. One of these guys pulled me aside later and asked if I was interested in buying one or two of his properties ‘at his cost.’ — HA!
I would say spring of 2011 would be a good time to buy RE, but only borrow 1/5 of the equivalent of your net worth at that time.
On occassion I read the WSJ RE board and their are still some bulls out there- especially some guy named “Happy Hair”.
The bubble is also alive and well in a few other pockets of the country like Central Texas (according to the media). I wonder of the perma-bulls will keep chasing “cheap” markets until the median home price is above 200k in every MLS area in the country?
OK, I get it now! People hear talk of this bubble thing, and then it becomes a self-fulfilling prophecy. Never mind that people can’t afford houses in many markets anymore, that flippers have poisoned the market, that people are mortgaged to the ying-yang, price-to-rent ratios are way out of whack, or that interest rates are on the rise. It’s all psychology.
It’s all psychology on the way up. It’s all reality on the way down.
But it is! All the things you state were true two years ago, but house prices continuted to go up because of the psychology. As long as people believe that prices would continue to go up, they would pay any amount!
This bubble wasn’t driven by the flippers who, after all, were selling as much as buying. It was driven by all the folks who felt they had to “buy now or be priced out forever”, and would pay any amount for a house because they just knew that real estate always would go up.
If you took those people away there wouldn’t have been any flippers; phony apprasials wouldn’t have mattered, and no one would have needed the creative financing. All it would have taken is for people to simply say “No, that price is too high. I’ll rent instead.”
Actually, that’s not quite true. By the NAR’s own admission, specuvestors accounted for as much as 40% of residential RE demand last year –which means the true figure was much higher. The ignorant “buy now or be priced out forever” sheeple were definitely a factor, but not nearly as significant as the $0-down 110% LTV neg-am only specuvestors. Greed has been just as responsible for driving the market as fear –if not more so.
It’s the psychology of an empty wallet and a bank account that’s got 3 figures or less.
“3 figures or less”
Does that count the two figures to the right of the decimal?
Next question: do prices fall below long term “fair value” based on ratios to household income or replacement cost?
I believe the stock market was just approaching fair value at the 2003 trough, and has been above fair value since the snapback. So it could be that housing prices remain high. A long way down to high, however.
I think a real crash (as opposed to the crash to reality of fantasy pricing) requires overbuilding. I don’t think we’ll get real, as opposed to seeming bargains in NYC.
I don’t think overbuilding is required for a real housing crash. It just requires a big turn in psychology. My country had a -40% pricecrash within 1.5 years around 1980, and there is no real explanation why that happened. Suddenly buyers disappeared from the market and the bottom fell out. It certainly had nothing to do with overbuilding because there is always some kind of ‘housing shortage’ over here.
Compared to the pre-1980 bubble, our current housing bubble is nearly 10x bigger in pricegains and 3 times bigger in timespan. But up to now nothing has happened, the psychology for most EU housing markets is still that of irrational exuberance.
I’m pretty sure that in many EU countries houses will not approach fair value within at least 10 years or so. With the current gains of 300, 500 or more than 1000%, a quick return to fair value would annihilate the EU banking system (and probably the whole tax system as well because of the required bailout).
There are 14,000 condos coming on the Manhattan market next year. (Sorry, don’t have a citation for it.)
Talk to me after that.
Alternately, take a cab ride down 10th Ave (upper west), or along 2nd Ave (south of 57th.)
My jaw drops every single time at the supply coming on the market.
there are people in manhattan paying $2500 for crappy studios. $500,000 for a brand new condo studio they are building with all the latest gizmos and decorations aren’t that bad.
I don’t think prices will keep rising here, but I don’t expect the kind of crash we had 15 years ago. Maybe a 10% - 15% drop and no gains for years to come. and “fully renovated” will finally mean real renovations and not just a new coat of paint on top of 50 years of paint already on the walls
Do tell, what economic miracle underpins this assertation? Selling property to each other doesn’t count.
Rent control artificially boosts demand for the rest in Manhattan.
“I don’t think prices will keep rising here, but I don’t expect the kind of crash we had 15 years ago. Maybe a 10% - 15% drop and no gains for years to come. and “fully renovated” will finally mean real renovations and not just a new coat of paint on top of 50 years of paint already on the walls.”
dba, you are dreaming — or else have a formerly hot but rapidly cooling manhattan co-op for sale. with some luck, you’ll see 2005 prices in 2020. it will be much worse than last time, if only because of the tsunami of inventory, mostly new/pre-construction condos. like riverside drive? of course, if you can find a nice pad there. but mostly fughedaboudit: it’s new construction on riverside BOULEVARD that’s for sale as far as the eye can see. YUCK!
not to mention the HUGE new gehry designed ratner/extel project (16 big highrises) planned for brooklyn waterfront.
Larry, take that cab south along the Bowery (yes, y’all, that Bowery, the avenue where all the “forgotten men” used to rent SROs on in Lower East Side). It’s almost non-stop condos. Truly staggering.
The last downturn added lots of rental stock to the city (repartments), so it should turn out to be a good thing (for renters, that is).
But we do have overbuilding. Housing stocks have climbed far faster than household formation. In addition, since the building has tended to be “upscale”, we have an over-build of large/fancy properties compared to what the total household demographic can afford, even putting aside the doubled/tripled selling prices. Witness all the nearly-unfurnished McMansions. Median families can’t afford to “feed” 3,000 sqft homes any more than they can afford $600k mortgages.
Not to mention that (a) a lot of this new luxury home construction was way out in exurban areas that previously were more sylvan than suburb and (b) as energy prices rise, even a cheap price on such a property won’t be worth it because of the cost of heating it, cooling it, and driving to it from anyplace else worth being.
I’m sure this has been said before, but right now it looks as if there are a lot of margin calls going on in the RE market. It’s as if people were treating RE like commodities, only everyone was going long.
‘It feels like a bigger thing than it really is,’ said local real estate analyst Gary London said.
NO Gary, it’s way worse than most people think. Spinning ’till the end.
I am looking for an increase in suspicious arson cases.
Any thoughts on this?
Yep, it will be another box to check on the way to the bottom of the housing bust.
Which will drive up insurance premiums even more which will drive the price of housing down even more. Will insurers adjust their premiums down 30% when housing prices (and therefore presumably replacement costs) fall 30% or more? No, insurance costs, like assessments, are sticky both up and down. Thus, taxes and insurance as a % of total house cost are destined become an even GREATER burden on homeowners over the next few years
OT…
U.S. July existing home sales plunge to two-year low
By Rex Nutting
Last Update: 10:00 AM ET Aug 23, 2006
WASHINGTON (MarketWatch) — Sales of existing homes plunged 4.1% to a seasonally adjusted annualized rate of 6.33 million, the lowest since January 2004, the National Association of Realtors said Tuesday. Economists were expecting a decline to 6.56 million, according to a survey conducted by MarketWatch. The inventory of unsold homes rose 3.2% to a record 3.856 million, a 7.3- month supply at the July sales rate, the highest since April 1993. The median sales price has risen 0.9% in the past year to $230,000. It matches June for the weakest price growth in 11 years.
The median home price rose 0.9%, avoiding another major sign of weakness, but the supply of homes for sale rose to 7.3 months from 6.8 months, suggesting further overhang is building in the real estate market.
US existing homes sales come in at 6.33 vs. expected 6.55 mio and prior 6.62 mio
More to Come
Note that the June 2006 was adjusted down from $231,000 (p) to $229,000 (r).
In other words, from June 2005 to June 2006, nominal prices were flat.
I have a full analysis at my blog:
http://interestrateroundup.blogspot.com/
Quick and dirty is that the decline in sales rate was worse than expected. The available for sale inventory ballooned to a fresh all time high. And in three out of four regions of the country, the median price DID decline YOY. Only the South turned in a gain. Ugly…
New affordability index for desperate realtors:
If you can buy a cracker box in Moreno Valley, commuting 2 hours a day to your job that you held on to despite most of your co-workers getting their jobs outsourced to India, and you can still make your I/O or Neg-Am payment (zero down of course, and now your home is hemorrhaging equity) at the end of the month after eating Top Ramen, then you can afford it.”
Why do you people hate Top Ramen so much? I love the stuff and you can eat dinner for 9-12 cents! How great is that???? Sometimes I really go to down and throw in a few veggies to bring the unit cost up to around 20c per meal but even then, it’s a bargain. LOL
Good point. I always joke about Top Ramen, a diet staple in graduate school, and California, apparently (but there it is accompanied with very good wine).
True confession. I love the stuff too!
Ramen noodles are totally devoid of nutrition, they only have empty calories. The noodles are metabolized as pure blood glucose, spiking insulin levels. Since the noodles have no fiber, you later feel a crash or let down. Additonally the noodles are made with trans fats, and the instant noodles in the cup additionally contain dioxin. You can also eat a spinach salad made at home inexpensively and quickly and actually eat real food.
So true. But spinach saland would be missing out on that MSG lift that makes Ramen so special.
I don’t know why people always say the elderly will end up eating cat food.
Pricewise cat food is friggin’ caviar when compared to Top Ramen.
It kept me alive as an undergrad and I confess it is still tasty. However the sodium levels can choke a cow. Moderation!
8/1.00 at my supermarket! It is an EASY target!
Cat food or Top Ramen? ;-
Mac and Cheese - 5 for a $ on sale - add mayo, mustard or BBQ Sauce or even salad dressing. Tasty, cheap, and will satisfy you while clogging your arteries.
Did it for years. Hamburger Helper without the hamburger is also cheap and good if you pick the right variety.
Helped me pay off student loans and, eventually, a mortgage. A tradeoff?
No good - amigo. You forgot that Inland Empire has 4 to 5 families per house and mortgage. One legal (who is on the title - but doesn’t live there) and the other family members ( not legal ).
(Sales of existing homes plunged 4.1%)
Sounds like the media bandwagon exaggeration is going the other way. By what standards is a 4.1% decline a “plunge.” I’d expect a much steeper decline.
Jeebus Larry, you don’t want much.
A 4.1% decline month on month is horrifyingly steep. Remember that the June figures being used for comparison were themselves lower than May.
OK, so the above article says the market is in “uparalleled uncertainty”. What’s the next stage? I keep forgetting that series of stages that starts with denial. How does it go? Denial, anger, uncertainty, fear, capitulation, acceptance? Is that it? Because we’ve already seen the denial. And certainly the anger, with all the FBs pissed they can’t get their price.
You left out bargaining - when you make a deal with the devil to make it all go away. In the case of housing I think this will come to people looking for new mortgages however ludicrous and then to great deals for buyers just so they can get out from under.
“And certainly the anger, with all the FBs pissed they can’t get their price.”
I wonder how many of these FB’s were given everything that they wanted as children? I know a couple of them, and they remind me of the little girl on Willie Wonka & the Chocolate Factory who says,
“Daddy I want it now!”
Veruca Salt Songs
1971 film
Who do you blame when your kid is a brat,
Pampered and spoiled like a Siamese cat.
Blaming the kids is a lie and a shame.
You know exactly who’s to blame:
The mother and the father.
[edit]
2005 film
Veruca Salt, the little brute,
Has just gone down the garbage chute,
And she will meet, as she descends,
A rather different set of friends!
A rather different set of friends!
A rather different set of friends!
I would love to know how she looks now. She has to be about 40, right?
“Put your head between your legs and kiss your ass goodbye” Were not going to crash though, it will be a soft landing
I remember in the 70s when you could not give, thats give away apartments in NYC. You could rent for less than the maintenance costs. Many landlord walked away from thousands of buildings, the city took them when the landlords stopped paying the taxes, these buildings are STILL occupied by squatters, some who have been there for 30 plus years
I remember those squatter apts. well.
My sister lived in one in the early 80’s and frankly, it was the nicest apt. she’s ever had in NY. And it was free!! Electricity was sparse because there was just one heavy duty electric cord running from the next building. But they had a fridge and radio and some lamps and a big beautiful space.
Another friend bought a 5 story bldg in the 70’s from the city for a couple hundred dollars.
Manhattan has definitely seen it’s ups and downs financially speaking. And the down times were a lot of fun.