“What Is A Soft Landing?”
Readers suggested a topic about a ’soft landing.’ “How about this issue: what is a soft landing?”
“I expect a soft landing, but my definition of the term is a lot different than that of the NAR. In my definition, the price of housing retreats to affordable levels (by traditional measures) in three years, with big nominal decline in 2007 and real declines afterward, and the excess inventory is absorbed at lower, affordable prices. But the economy is either flat or has a mild recession in 2007, followed by a recovery, instead of collapsing.”
“I call that the good ’soft landing’ scenario, and I think most posters here would agree. Especially those writing about canned goods, ammo and ’senior vittles.’”
A reply, “I would call that a soft landing for the economy, but not for the housing market. I have proposed the following scale a couple of times, and judging by the MSM headlines we’re starting to see in various states it seems to be holding up OK.”
“Using category 1,2 etc meanings from hurricane parlance; Soft Landing = Real median price decline. Hard Landing = Nominal median price decline. Category 1 Crash = More than 10% nominal median price decline. Category 2 Crash = More than 20% nominal median price decline, and so on.”
“A nominal median price decline is a lot harder than it seems at first glance, due to buyer substitution effects and increasing seller incentives that are now being frequently remarked on.”
Another said, “I would consider a nominal median price decline of 10% to be a very soft landing. That would only be enough to take the tip off the rediculous prices. 30% would just start to be reasonable prices. I wouldn’t consider it a hard landing at less than 40% nominal median decline.”
The second poster answered, “I respectfully disagree. A 40% median price decline is similar to what happened in the Houston area during the 80’s oil bust, and that was regarded (and reported) as an almost apocalyptic crash, well worthy of the Category 4 that my scale would give it.”
“In the UK in the early 1990’s, there was a Real Estate crash which saw something like 30% of all homeowners in the South-East (which includes London, and is the region with the highest prices and wages) in negative equity. Yet the nominal median fell by less than 20% from peak to trough (which took 4 or 5 years).”
The Herald Net from Washington. “It used to be a popular notion among local real estate agents that the Northwest housing market lagged behind the California market by about six months. I thought about that idea recently when I read that home sales decreased 30.1 percent in August in California from the same month in 2005, the largest sales decline since August 1982.”
“Things are a bit different here, and will continue to be. While the past 24 months have been crazy, the long-term outlook for the Puget Sound housing market continues to be bright. Local prices are not headed backward or even close to a ’soft landing.’”
“The ’soft landing’ term began about a year ago when David Lereah, the National Association of Realtor’s chief economist, tried to steer clear of any concept of national or regional housing bubbles, preferring to substitute balloons for bubbles. He confused many observers by saying: ‘Balloons don’t burst. You can put air in a balloon and it expands or you can take air out and it shrinks. We’re hearing a hissing sound not a pop … there’s a soft landing ahead.’”
“‘I don’t see a lot of areas in the country are really in for a soft landing,’ said Joe DiPaola, real estate attorney and broker. ‘I think what we have seen is that some areas have gotten absolutely hammered and others have slowed down just a bit. So, when you look at it on average I guess you call that a soft landing.’”
“John Tuccillo, one of the nation’s leading real estate economists, continues to assert that the local economy is the prime mover of single-family homes. ‘No housing market has ever collapsed unless the underlying economy went sour,’ Tuccillo said. ‘Short of recession, this means that virtually every housing market in the U.S. will hold up even though sales may slump and prices decline.’”
“So, when your friends in California swear the sky is falling and real estate will no longer be the same, remind them that property is cyclical and that their neighborhood will rebound when the ‘down’ period ends late next year. And, the down period in the Puget Sound will mean slower, not negative, appreciation.”
The Rocky Mountain News. “Denver business and civic leaders thought they knew fast growth and big construction. Then they arrived here and started counting construction cranes. ‘I went out on my hotel room balcony this morning and saw nine,’ one traveler said. ‘Looking out my window, there were 13 cranes,’ said another.”
“Indeed, the level of building activity is staggering. One rendering showed nearly 100 buildings, big and small, under construction or in development along Miami’s skyline. Miami Mayor Manny Diaz told the group $30 billion of private-sector projects - including 90,000 residential units, are under way or permitted.”
“The big question, of course, is how Miami will cope if, some say when, this all comes crashing down. Early evidence suggests there is no contingency plan, as Friday’s first session was titled ‘Metro Miami’s Changing Landscape - Why Real Estate Is Thriving in Southeast Florida.’”
“But even speaker Adolfo Henriques, the CEO of developer Florida East Coast Industries, acknowledged the possibility of an ‘adjustment.’ ‘We’re in the midst of a correction in the residential real-estate market, but I believe it’s an 18-to-24-month situation, and we will have a soft landing,’ Henriques said.”
Fed Governor Don Kohn has been working on nuances of definitions:
“It’s not a bust nor a crash — it’s a correction.”
———————————————————————————————————–
NATION’S HOUSING KENNETH HARNEY
Housing slump not all doom and gloom
October 15, 2006
WASHINGTON – With all the dismal reports about the home real estate market, don’t lose track of something critically important: Mortgage interest rates have been falling quietly but steadily for weeks, and are now at their lowest level in half a year, barely a percentage point above 40-year lows.
New mortgage applications are up sharply, the number of pending home sales is up, the national economy continues to expand moderately, and the rate of unemployment just declined again – to 4.6 percent.
All of which raises the question: Just what kind of housing bust is this anyway? With gloom-and-doom purveyors forecasting imminent crashes in dozens of metropolitan areas, how could such key fundamentals as jobs, interest rates and even pending home sales simultaneously be trending in the opposite direction?
Donald L. Kohn, the Federal Reserve’s vice chairman, took a stab at that seeming conundrum in a speech Oct. 4 at New York University. His views are worth keeping in mind if you want to put the negative news on home prices and sales in perspective.
To begin with the fundamental point: Kohn sees no imminent bust or crash in housing at all. It is a “correction” that’s under way – a cyclical rebalancing of a marketplace that got too hot for too long in some parts of the country, and is now heading back toward more “normal” conditions, where prices are more in line with what consumers can afford.
“The reported declines in house prices in a number of areas should help to facilitate the rebalancing of supply and demand in those markets,” said Kohn.
http://www.signonsandiego.com/uniontrib/20061015/news_1h15harney.html
In seven or eight years, we can all look BACK and tell who was RIGHT! Was it Lareah, Lay, or the other real estate shills or was it Gtstucco, Txchick,lainvestorgirl or others on this blog? We ought to put some of our money on one of the Hedge site at the ChiMerc or Hedge Street to make it interesting. I just don’t like either of their criteria.
I want some law passed that bars these clowns — especially Liar-eh — who did this in the dot con as well. These are serial offenders.
I forgot, excuse me, to mention Carol Lloyd (sfgate), Suzanne, or Nina. Funny that they are all split tails.
And he is the smartest one we have on the Fed!
In a nation where the population is kept in line, or controlled, by propaganda, manipulation of the language is the most important skill. 1984 in full action?
Jas Jain
The confusion is due to the media…
‘The source of some of the confusion about just where housing is headed, and how bad things are likely to get? Mike Moran, chief economist of Wall Street’s Daiwa Securities America, minces no words: The financial press and TV news shows are overly dramatizing what is a normal and long-predicted cyclical rebalancing, and “portraying it as a catastrophe.”
Housing “is going through a correction that’s badly needed,” he said. “The key issue is whether it is orderly or disorderly” – and all signs point to a continued orderly process, not a breakout bust or panic.’
And don’t miss Doug Duncan’s advice to ignore the doomsayers. Last time I checked, he was renting and waiting for lower home prices, but I assume he has bought by now, as the worst is over. Can anyone corroborate?
‘Doug Duncan, chief economist of the Mortgage Bankers Association, points out that national housing sales numbers are merely rolling back to 2003 levels – “and that was a record year.” Serious sellers and buyers shouldn’t be misled by predictions of imminent crashes, said Duncan. Not only do the doom reports ignore the positives out there in the marketplace – mortgage rates in particular – but “the rhetoric is just way overwrought.”’
A “soft landing” is a synaptic resonance that assumes that any amplitude variations are subject to accelerated pauses and inevitably, reverse forward thrusts that are buffered by palpable occlusions of liquidity.
Reference: Professor Igor Boobanik’s “Guide For RE Agents – Key Words & Definitions”, DoubleSpeak Publishing, New York, 2006.
Randomness. Substitute realty for stocks and read Burton G Malkiel’s ‘A Random Walk Down Wall Street’ or Nassim Nicolas Taleb’s ‘ Fooled by Randomness’. In any event prices and volumn are going DOWN or is it volumn and then prices are going down???
This is not a soft landing; it’s harder than a soft landing.
Robert Toll
- “John Tuccillo, one of the nation’s leading real estate economists, continues to assert that the local economy is the prime mover of single-family homes.
- ‘No housing market has ever collapsed unless the underlying economy went sour,’ Tuccillo said.
I can say that here in So Cal thousands of unqualified buyers now own homes (for a while). Only suicide loans allowed this to happen. The underlying economy screams out clearly, “Your wage CANNOT support your debt.”
Indeed. It seems that Realtors and Real Estate Economists will not concede the grotesque disparity between mortgage costs and incomes these days in bubble regions. Current valuations are houses of cards that they helped to build on toxic loan foundations in the swamp of a bubble-driven economy. No economic shock will be needed to level them. Nature will run its course.
One of the key factors in the great depression was the advent of “payment plans” after WWI. Suddenly, “average joes” could buy all the consumer goods. The 20’s exploded and a cycle ensued. Advertising expounded the “easy payment plan”. More people bought more stuff, more people got hired to make the stuff. Eventually, Land (especially Florida) and Stocks, were bought with “easy payment plans” in the new era of prosperity…….
Then in early 29′ consumption dropped off…… What happened? Everyone was “all full up” in goods and debt. Then what happened?
regardless of what the Realtors and their lackey Economist say, it’s NOT “different this time”
Seems more like….. “Deja Vu, all over again”
John Tuccillo, one of the nation’s leading real estate economists
Damned with faint praise.
‘No housing market has ever collapsed unless the underlying economy went sour,’
A point well taken, but to broad to have any meaning. Has the underlying economy since 2001 been sweet? Housing since 2001 HAS BEEN the economy.
Apart from housing, job growth has been weak (and strongly tied to REIC). Stocks have gone nowhere, debt has soared, personal income and savings are in the toilet. Sure there ahave been some good points, but this is not an economy to rave about.
When housing goes down the whole thing goes down.
I don’t know about defining a soft landing, but at this point, any drop under 30% would be pretty disappointing, that is, for me as a bubble watcher all these years.
Others have posted Jeremy Grantham’s study of asset bubbles, he found that every single one no matter what reverted to the mean.
Check it out here and spread the word. I did my part on a shuttle ride from the Oakland Airport rental counter to the airport.
https://www.gmo.com/NR/rdonlyres/3474101F-A17F-460C-BF9A-1EBFE2747501/460/JGLetter_1Q05_ALL.pdf
Grantham is one of the wisest, most articulate and most successful money managers around. Ignore at your peril.
After 4shzl’s comment, maybe he is lurking here!
The following post is reproduced from a stock trading website where it appeared on August 23 of this year. I do not know the poster personally, but his words have a ring of authenticity that I believe is very hard to fake.
“After having been a successful trader for years, I got married and to go into the slower lane I sold my seat and started rehabing buildings in the NY Metro area in 1983. By the time the stock market crashed in 1987, I had a full pipeline of buildings in various stages of development and many unsold finished units. Eventually I lost it all, and the stages of a real estate cycle are clearly etched in my memory.
The participants in the RE cycle are not like us traders, they respond slower after all it is somewhat tied to their life cycle.. The average person only hears the success stories and, more often than not, the older ones had good experiences so they respond to the news or market conditions with disbelief. WE ARE AT THIS POINT IN THE CURRENT CYCLE NOW- DISBELIEF. The music has changed but they don’t hear it. The more desperate or experienced ones mark their buildings down but basically can’t sell it. Real estate transactions - contract, appraisal, financing and closing take time, foreclosures drag out so the change in market conditions takes time to show up in the numbers.
When the perils of real estate are daily fodder in the media, buyers shy away - not that they have no money but they hold onto it. One of the other things I observed that is the higher end rental market shrinks because people out of college for only a few years go back to live with their parents or share space with others.
The next stage is RECOGNITION when reality sets in. You want to sell but, in addition to the don’t-wanters like you, banks are flooding the market with foreclosed real estate. At first they are cocky, they want to get full price - after all they appraised it to the ridiculous value - but at some point, their bad loan ratio is unacceptable to the government and they start offering at the value of the mortgage and eventually at any price. By this time, all the friends of the bankers and loan people have bought cheap foreclosed properties from their banker friends but they have not even made a dent in the inventory.
Banks are not equipped to manage the real estate and taking back property causes chaotic conditions for them. One of the largest banks - upon foreclosing on a building of mine because I fell behind - forgot to tell the tenants where to send the rent and the tenants lived there for almost 3 years without paying rent. In another instance a bank foreclosed on a 20 story building (on Fifth Avenue in Manhattan no less) and put the mortgage up on auction and the owner’s representative bought it back for 10cents on the dollar, a 10+ million windfall.
Around this stage they are giving houses or buildings to Real Estate agents en masse to liquidate and bargain hunting becomes a sport, vulture funds and experienced investors pick up some of the larger pieces and some of the banks offer to lend the down payment to creditworthy individuals. To arrive at this stage will take YEARS.
So the process is like in any other market - on the way down PROPERTY GOES FROM WEAK HANDS INTO STRONG HANDS. Until the transfer is complete the new cycle does not start. At the BOTTOM of the cycle properties are realistically priced in terms of income stream or replacement value and stories abound of people having picked up great bargains.
Something else happens while this is going on, there is a young generation advancing in age and financial strength who may have lived through the decline but have not owned anything and therefore does not know pain. These people will be the fearless buyers in the UPSWING of the next cycle.”
Why can’t humans learn the easy way — from the hard luck stories of others — instead of the hard way — from reliving the mistakes of others?
Gee…. And Miss out on All The Fun? What are you… NUTS?
I had a former boss say to one of my peers “Isn’t it about time you learned from SOMEONE ELSES mistakes.” I about peed my flightsuit when he said that!!! The funny thing was, IT WAS an accurate statement.
I work with an old timer. When he screws up he always tells me “I learn hard, but I learn real good, boss”.
Because - “I am smarter than you”…or…”We are smarter today”…or…” Technology speeds the flow of information”…or…”It can’t happen to me”….
Wow! Great article.
- on the way down PROPERTY GOES FROM WEAK HANDS INTO STRONG HANDS.
This happens everyday in the stock / futures markets. The traders run the ’stops’ and ‘flush out’ the weak hands (the ones without the financial resources).
My wifes parents loaned us money in 1983 at 12%….they Borrowed the money at 18%!! to purchase our first home. Young folks have nothing to measure current circumstances against except what the ‘Instant’ media tells them.
Great summary of the cycle. Thank you.
PROPERTY GOES FROM WEAK HANDS INTO STRONG HANDS.
Here’s hoping that everyone reading this blog is preparing to be a “strong hand”. I certainly am!
That graph someone posted last week http://graphics10.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
suggests house prices will revert to the 1998 level at some point. I think this will be in 2011 or 2012. California houses will be included, of course. When the prices go up so high as in that graph, they will have to come down hard and fast. More than 7% per year compounded the next 6 years, IMO. Or would you rather have 20% compounded cuts the next two years? Pick your poison.
Real estate is one thing you can more easily time. In 1997 people thought house prices no longer will go up in their lifetime. That was the low point. When that though is prevalent again, that is the time to buy Real Estate. You can at least dollar cost average in gold, stocks, T-bills, and other areas, but you cannot dollar cost average in something where the average unit of purchase is $100,000 or more, unless you have at least an 8-figure net worth.
Bill –
Excellent, level-headed advice as always. As you suggest, reversion to below the mean is the norm at the end of speculative booms, and until many of yesterday’s sage 20-something real-estate investors are all lamenting the fact that real estate is “the worst possible investment,” the wise course of action will be to wait in the wings and let others catch the falling knives.
You are right on the money with it takes an 8 figure net worth to be able to dollar cost average Real Estate. This is why it is so important to educate oneself on the details of each and every Real Estate purchase, financing terms etc. Most people have little ability to amass an 8 figure net worth and the main reason they can’t even hope to get there is financial illiteracy. This blog has given me insight to others opinions and has caused me to rethink my own. Sometimes it causes me to change course but mainly it reaffirms what I already knew but wasn’t as confident as I am today. If one saves their money today they will be in position to be the strong hands of tomorrow and will have a great shot of at least a 7 digit net worth and even an 8 or 9 for a few.
That is the scariest graph ever. When that sucker turns down the economy is going to barf!
‘A 40% median price decline is similar to what happened in the Houston area during the 80’s oil bust, and that was regarded (and reported) as an almost apocalyptic crash.’
It should be pointed out that there was quite a bit of real inflation during that time, so the correction in the oil states may have been larger in percentage terms without it.
I won’t disagree there.
A UK site I lurk on shows the Real UK median going down from 110,000 to 70,000 in CPI-adjusted (=today’s?) GBP during the early 90’s. So the real decline was about 35%, rather than the nominal 20% I reported. (And interestingly, the bottom of the real trough was about 18 months after nominal prices turned upwards again.)
However I’ll stand by my scale until I see a better one. It has the significant value of simplicity, and given the leverage in RE nominal price changes may have more impact than real changes.
It is the new “Charmin tag line: ” we’re not just soft, we’re BRUTALLY SOFT”..”This time we squeeze you” till your eyeballs are poppin’……
There is no soft landing- the curent economic scenario for housing and the stock market wil continue-untill 2009-2010- then thr eral meltdown will begin- relax, invest and know damn well when to get out out.
SkyTrek –
What are you suggesting everyone invest in? The flip properties you are trying hard to unload into the crash?
skytrekker
Me thinks most of us on this board already “knew” when to get out (note pass tense)
I see you are another person not wishing to “Miss out on all the
Fun! Enjoy…
note regarding 40% decline:
the Netherlands had a -40% price decline (in the national average homeprice if I am correct) within 1.5 years around 1980. This crash came after a 100% pricegain that took about 5 years. Around that time inflation was high (interest rates near 10%) so the -40% crash completely wiped out the previous gains. I know several examples of buyers who purchased a home at more than 50% below asking price. There was no clear single cause for the crash, after a few years of RE fever the bottom simply fell out of the market.
It was a disaster, but only for the people who really had to sell. I don’t think there was any serious damage of this crash to the economy. But this time it IS very different. The pricegain in the Netherlands during the current bubble is nearly 10 times bigger than in the seventies, interest rates have far more upside room and unlike the seventies most of the financial risk has been shifted from the leveraged homeowners to society (taxpayers, savers etc.).
Two thoughts: (1) A 100% gain followed by a 50% reduction is net back to square one even if there were no general inflation. (2) Al Gore movie implies there won’t be any Netherlands at all, pretty soon, so give back keys and passport and walk away.
sure, just like the coming mortgage default flood, rising sea level is a looming problem that politics here chooses to ignore (probably more than 90% of new homes in the Netherlands are built below sea level). Many Dutch homes could be under water before their mortgages.
I would tend to agree with the 40% figure in bubble areas East and West Coasts. Obviously there are areas such as South Riverside, CA where prices have gone up as much as 300% and in those areas, it is possible we will see price drops on the level of 60%, particularly given the brutal commute endured by residents there. You do not want to be the guy who bought after 2002 in these areas. I could see certain senarios such as Google opening shop in an area and hiring 1000 developers and PM’s thus creating a hotzone of prosperity, but in most areas, nothing changed at all to suggest increased market value except for speculative greed and an overabundance of flippers feeding on each other, along with a banking environment which will loan money to anyone willing to say they make 100K a year.
The further out the houses are (from major employment, cultural, etc…) and depend on commuting, the harder they fall…and the slower they come back.
Pemberton Heights in Austin (2 miles from downtown) bottomed in 1990 and recovered old value by 1996. Round Rock (pre-Dell; 15 miles from downtown) bottomed in 1990-91 and when I left at the end of 1995, was still down 15% from 1985.
in my area of the Netherlands there are no fundamentals to support current home prices (8-10x the price of 15 years ago, while income has increased maybe 50%, or just a little above inflation). A correction to the trendline would be 85% down; it will not happen because all the banks and government would be bankrupt. So they will organize a bailout from taxpayer money and correct prices by hyperinflating; the ECB is feverishly working on it. I guess there are areas in the US that also had such ridiculous price runups; it’s all unprecedented.
I agree hyper-inflation is probably the way out of a LOT of current messes. Here in San Diego, the pension fund is essentially bankrupt, and in general our whole Social Security fund is projected to run dry. The national debt is staggering in the US and personal debt is equally staggering.
What I don’t see happening though and this may be the downfall of any govt. plans is that wages are essentially stagnant due to downward pressures on wages from third world countries and the whole offshoring phenomonen, so perhaps we need a replacement for wages…
If 90+% of mortgages written over the past 5 years were 30 year, fixed rate, 20% down, then I believe home prices could fall moderately for a year or two an it wouldn’t lead to anything worse.
But that isn’t the case. Apparently, about 40% of mortgages recently were subprime, many no-doc, many I/O or negative amortization… Here’s a stat I came across, in th efirst quarter of 2006, 40% of subprime mortgages in California refinanced! What happens when they can’t refinance because prices have fallen just slightly?
Anyone who thinks they are going to watch home prices fall 5-10% and be able to sit on the sidelines smuggly thinking how smart they were, is likely to be in for a surprise.
Either housing begins to recover from the current dip as the NAR predicts, or things will head south in ways none of us anticipate. There is absolutely no way there is going to be a painless adjustment in prices.
Bob –
I agree with your “catastrophe risk” scenario, with a small probability that the REIC’s “friends in government” will pull out some clever market subsidies (similar to the many already in place) to reflate the bubble. But at the end of the day, that will make the crash much worse, at least in SoCal, due to the effect of further widening the gap between demand (constrained in SD by a median hh income around $65K) and supply (the building industry divides the upper- and lower-halves of the market at $700K).
Respiking housing demand (that is, creating further inflationary pressure in housing) will only tempt the builders to keep adding to the McMansion glut, as they make relatively more money on overpriced faux chateaus so long as prices remain at or near mania levels. So in the unlikely event that prices plateau, the glut of supersized homes will continue growing until the supply imbalance eventually sinks the market. Hopefully the govt will not succeed in delaying the day of reckoning, as the aftermath would only turn out worse in that case.
I think that you hit the nail right on the head: bad mortgages are going to make the coming correction/crash/whatever much more brutal than anything most of us have seen in our lifetimes (any survivors of the first Great Depression on this blog?).
But another factor that will compound the damage and further retard prices for at least a decade is the collateral damage of the housing bust on the economy. Right now, things are superficially looking real good for most Americans: unemployment is low, energy prices have retreated for the time being, the stock market has produced solid YTD returns, etc. But the collapse of residential real estate will prevent all of those trends from continuing (except perhaps for energy, although global demand will likely continue to push it upwards).
Also what happens when there’s another shock to the economy? Its only a matter of time before another major disaster (something on the order of Katrina, 9/11, etc) strikes.
Most households throughout this country cannot expect to service their present debt load in the best of circumstance over the next 10 years. What happens when something unexpected happens?
(any survivors of the first Great Depression on this blog?).
Not many of them left.
There are quite a few left….but they are in their upper 80s and 90s (that can remember it as a teenager, young adult). However, virtually none of them use computers or the Internet.
Don’t forget the widespread fraud.
“Anyone who thinks they are going to watch home prices fall 5-10% and be able to sit on the sidelines smuggly thinking how smart they were, is likely to be in for a surprise.”
Indeed. The faster the downturn, the more widespread the collateral damage.
I hope the Fed does everything in its power to slow the downturn in housing prices. Ultimately, prices will fall regardless. But in a more controlled downturn, there will be more opportunity to limit the damage to the greater economy.
I’m not sure if slower is better. I think the bandage-ripped-off-quickly scenario seems preferable here in CA, where the bubble is so damned bloated. A swift shock to the system will flush out the huge amounts of subprime debris (especially our scads of noxious mortgage lenders and the hapless/greedy souls they finance). I believe places where middle/upper-middle class people (earnings-wise) have more prudent savings/spending patterns (i.e, the Midwest) will be far better off than silly “lifestyle” places like CA and FL, where looks are indeed everything, and where savings belong mostly to the very, truly wealthy.
agree, I’m sure a slowly grinding downturn of 10-15 years is far worse for the average citizen than a quick crash that eliminates the gamblers and other idiots from the equation.
No one can “control” the downturn! It is already too late to turn the psychology around except in a few holdout areas like Austin and Raleigh, which, as they are depending on people moving in that are going to be wary of real estate, will follow other places down.
The only way to minimize the damage is to let people off the “hook” in foreclosure and give them a second chance. That will reduce the magnitude of the downturn. Punishing people that have been foreclosed on, particularly in a public way (articles, etc…) will actually drive the market even lower.
“If 90+% of mortgages written over the past 5 years were 30 year, fixed rate, 20% down, ”
If they had been, the prices would not have gone up nearly so high.
“I expect a soft landing, but my definition of the term is a lot different than that of the NAR. In my definition, the price of housing retreats to affordable levels (by traditional measures) in three years, with big nominal decline in 2007 and real declines afterward, and the excess inventory is absorbed at lower, affordable prices. But the economy is either flat or has a mild recession in 2007, followed by a recovery, instead of collapsing.”
This is a fairy-tale soft landing scenario, where prices quickly retreat to normal levels, nobody gets hurt and everyone lives happily ever after at the end of the day. If this actually materializes, it will be the first time ever in the history of capitalism. Even more miraculously, it will occur at the end of one of the biggest speculative blowouts in the history of organized real estate markets.
If prices fall back to traditional affordable levels, that’s a hard landing, fella.
“It seems that Realtors and Real Estate Economists will not concede the grotesque disparity between mortgage costs and incomes these days in bubble regions.”
In a nutshell, I think this sums up why the landing can’t be soft. And the fact that the benchmark keeps getting moved is a further sign. We’ve heard prices will never go down to prices will just moderate to prices will flatten to prices will slightly decline over the short term and then resume appreciating.
The MSM has been full of cautionary tales about suicide financing, and as banks start repurchasing bad loans, they’ll slowly tighten standards of their own accord. Without a stampede of more qualified buyers, the market can’t be saved.
Apparently, as a software engineer I earn considerably over the median here in San Diego. I would feel very insecure buying anything over $250K which eliminates me almost 100% from the current market. There is ABSOLUTELY do way most of the recent (past 3 years) borrowers can maintain payments on $400000 to 500000 houses and higher. An I doubt there is enough money in the universe to prevent the inevetible outcome of this horrible situation.
We are currently at the top of the roller coaster housing market track and slowing sales and flattening prices feels like a Goldilocks soft landing. However, as we all know that feeling is only momentary. So, buckle up b/4 the steep hands in the air everyone screaming fall. This is as soft as its going to get!
I don’t care about the semantics. Down is down, and the more leveraged a person/investor/builder is, the bigger the pain they will feel. Soft landing or ‘down in flames’ is just a matter of perspective. ‘A recession is when your neighbor loses his job; a depression is when you lose yours’.
Soft Landing — When one lands in a pool of mud, from which it is hard to get out, rather than on hard rocks.
Jas Jain
Oh, it’s gonna be soft, warm, brown and squisshy….. but it AIN’T gonna be mud. Something a bit more AROMATIC.
True. I wanted to avoid the bad smell and the rest. I knew that some will catch on.
Jas Jain
“What Is A Soft Landing?”
I don’t think it matters. Look at it this way: if nominal housing prices go down in my area 40% over 3 years, I don’t *care* if people call it a soft landing or a hard landing (or a pink potato). All I know is that I can buy for *about* the same price as renting. If it goes below that, I may start considering investing in real estate. The same goes for other markets/percentage declines.
I’m less interested in someone ‘winning’ the debate on soft vs. hard landing, and more interested in seeing price drops to what I consider benchmark prices.
I really don’t care if someone has four over leveraged investment properties and wants to call a 30% decline a “soft landing”. So let them call it a “soft landing” for all I care. What I care about is the 30% decline, and whether that decline means I can again start buying real estate at a value I consider reasonable.
“The big question, of course, is how Miami will cope if, some say when, this all comes crashing down”
An equally big question is how Miami will cope if they all get build and occupied. Miami has a population of about 360,000. 90k new residences, each with 2 people, equates to a 50% increase in population.
Is it reasonable to think there mighr be in Miami wiht this type of population growth?
This is a very good point. Miami city has one of the lowest population ratios to its metropolitan area in the U.S. This is because people do want to live in the area but prefer not to live in Miami itself because of the crime, the (slightly) higher taxes, the poorer schools and city services, the corruption in the police department, etc.
Now, all of a sudden, a huge new group of people are dying to live in downtown Miami again, instead of Coral Gables or Kendall or Cutler Ridge? Come on, people leave Caracas to live like Americans. Ever notice how riots always take place in the city? If the sh$t hits the fan, where would you rather be, stuck in your mortgage prison downtown, or in your nice 4/2 2000 sq ft house on SW XXX St?
What do you bet if there was a Federal ruling tomorrow that said all condo construction in the city of Miami had to stop, everybody would breathe a sigh of relief and walk away doing a “whew” and a “thank god” with their hand swiping their brow. But, no, everybody has to save face by blindly following each other into oblivion - it’s like a big confidence game. Certainly all the foreign money and locals who all speak Spanish are making the game crazier and more confusing. Miami has always gone in cycles, and this one is going to be another real stunner.
Also, as I’ve said before on the topic:
“Soft Landing” is such a fuzzy, imprecise term that it can only be applied to the psychology of the situation, and not to some precise economic underpinning. In other words, if the general population feels that things will still be ‘ok’ with a 2% decline in prices over 5 years, that is a “soft landing”.
However, with this definition of “soft landing”, be prepared for the benchmark to change. As the general population goes from bullish to bearish on real estate, expect the definition for ‘ok’ and “soft landing” to trend downward.
For example, during summer 2005, while the boom seemed to still be going strong, “soft landing” meant price increases of ‘only’ 2%-5% per year. When it was obvious that things were slowing down, “soft landing” was revised to 0% appreciation.
Now I’m hearing from people that 2%-5% *depreciation* per year over 3 years is a soft landing. As things get worse, people revise what they are willing to consider ‘ok’…if it’s *only* a 2%-5% decline per year, things will still be ‘ok’, so it’s a soft landing.
Where are you people having your convention? I get so tired of going to parties where people are either bragging about how much they made in RE the past X years or else complaining about how they or their offspring can’t sell their POS.
“Balloons don’t burst. You can put air in a balloon and it expands or you can take air out and it shrinks. We’re hearing a hissing sound not a pop … there’s a soft landing ahead.” -David Lereah
‘Soft landing’ seems to be as fluff filled as it sounds, if you look back through some of the news of the past year. The definition being used in the media changes almost month to month. Some highlights that came to mind-
At first, it was the idea that prices would slow modestly to let the market catch it’s breath, but still appreciate at near record levels. When y-o-y price gains started to decelerate, the landing strip became a plateau with sales dropping back a little bit because the market was slightly ahead of itself. This was followed by the scenario of a smaller gain in appreciation for a couple of years, before the market took off again. Next, it turned into a modest slowdown in appreciation, but all equity gains were still here to stay. The landing then shifted to being a return to normal market conditions. At least according to Leslie A.-Y. in Dec. 2005. (2 months later she would give up ’soft landing’ as her moniker and regret using it entirely.) Others would go on to describe the coming soft landing as years of flat prices ahead. From there, it evolved into a ‘market transitioning into an expansion,” according to David Lereah. When inventory started to pile up, DL stated that “This is a good soft-landing scenario,” also referring to slowing median price appreciation. As prices continued to sag, another definition came to include the idea that appreciation might not be here to stay, and that prices might dip a little before heading up again. In July, DL had this to say, “Could it be a 5 percent drop in prices? Could it be 10 percent? Whatever it is, it will be short-lived, because demand is right there on the sidelines.” And a few weeks later, “I am confident the housing sector is picking up,” he said in a press conference in Sept. Lereah said he expects prices to continue to drop for the rest of the year, which would keep home sales from falling further. If sales do flatten, “we’ll have achieved a soft landing,” Lereah said.
Soft landing seems to mean anything you want it to, and the landing scenario has become proportionately less cushioned as time goes on and reality sets in.
Re. the changing model of appreciation, there’s also been an accompanying change in the recommended amount of time to “buy and hold” your “investment” and still expect to come through it in one piece.
Last year it was 2-3 years, which changed to 3-5 years, which changed to 5-7 years. The latest I’ve heard is 7-10 years as in “RE may not be appreciating as before, but if you plan to stay there 7-10 years, there’s no time like the present to buy”.
Agreed. It has been getting more vague too. I’ve seen more of “if you find your long-term dream home, buy now!” sorts of rubbish as well. I guess that no one can quite come out and say that you might have to make a go of it there for up to a decade before you break even trying to sell.
I can tell you one thing for sure. If I lay awake at night worrying about how to pay for my “dream home” it is not a dream, but a nightmare, and one many are waking up to even now. I’m not talking about the plush carpet and the stainless appliances, but the stress which they carry with them.
The landing can be as soft as you like, but the fact is if people lose confidence in price appreciation in the foreseeable future and they are paying +2x rent to stay in a depreciating house, a lot of them are going to start walking.