Industry ‘Heavyweights’ On The Housing Bubble
Business Week did an interview with some housing industry professionals. “I caught up with three housing heavyweights, CEO Angelo Mozilo of mortgage lender Countrywide Financial, CEO Bruce Karatz of KB Home, and real estate bear Professor Bob Shiller of Yale University, and asked how worried we should be.”
“How would you characterize the housing market right now? MOZILO: The market has turned. The psychology of the buyers for single-family homes has clearly changed. We are seeing it from the flow of loan applications. If I had to pick a time, I would have to say it turned in January.”
“SHILLER: The real question is: Will it be a soft landing, or will prices come down substantially? It’s hard to say because this is the biggest housing boom that this nation has ever seen, so we are in uncharted territory. I worry about a big fall because prices today are being supported by a speculative fever.”
“How severe are the price declines you are expecting? MOZILO: I would expect a general decline of 5% to 10% throughout the country, some areas 20%. And in areas where you have had heavy speculation, you could have 30%. We will see…sellers back off from the prices they have been demanding. A year or a year and half from now, you will have seen a slow deterioration of home values and a substantial deterioration in those areas where there has been speculative excess.”
“SHILLER: In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. I can see that happening there again or in any of the cities that have had tremendous price increases, and there are quite a number of them in this country. I think a pullback of as much as 40% is plausible in many places.”
“KARATZ: I don’t see a fundamental slowdown other than in the hottest markets. Things don’t continue through the roof forever. In some markets, 10% to 15% of buyers were speculators. You take them out, and the market drops 10% to 15%, and it takes three to four months for whatever overhang there was to be sold.”
“Where are the most vulnerable areas? MOZILO: Miami and Fort Lauderdale. Las Vegas is another area where there is heavy speculation. That means people were buying three, four, five condos at a time and thinking they can flip them. Those are the spots we have identified where… we will only make loans when we know the person will live [in the housing].”
“SHILLER: The most spectacular cases are Phoenix and Las Vegas. They soared so suddenly. But others [are vulnerable, too,] such as San Francisco, San Diego, L.A., really much of California.”
karatz is so predictable. we’ll just shake out those nasty speculators, clear the inventory and move on.
or as the cowardly lion would say, “i don’t believe in witches, i don’t believe in witches”
Can someone tell me the name of the website that has the by city, state the median price increase/decrease as well as the inventory increase/decrease? I forgot to bookmark it…it’s a very clean site and has big numbers for each major area in green and red.
Here it is.
http://www.benengebreth.org/housingtracker/location/
Here’s another good one from OC Renter covers most of SoCal:
http://www.bubbletracking.blogspot.com/
“KARATZ: I don’t see a fundamental slowdown other than in the hottest markets. Things don’t continue through the roof forever. In some markets, 10% to 15% of buyers were speculators. You take them out, and the market drops 10% to 15%, and it takes three to four months for whatever overhang there was to be sold.”
Yeah. Kinda like how the NASDAQ recovered from the overbought condition in Jan2000 huh Uncle Brucey? Keep drinking the KoolAid.
it’s all BS. Dominion doesnt build in the “hottest markets”, and they’re all but toast.
75% drop in income:
http://columbus.bizjournals.com/columbus/stories/2006/02/27/daily9.html
Punts mortgage services to Wells Fargo:
http://columbus.bizjournals.com/columbus/stories/2006/02/27/daily10.html
“SHILLER: In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. I can see that happening there again or in any of the cities that have had tremendous price increases, and there are quite a number of them in this country. I think a pullback of as much as 40% is plausible in many places.”
To me the question is not if real prices will fall, but how quickly. Forty percent real value declines could happen with a forty percent price drop overnight, or smaller price drops combined with erroding inflation over a longer time period.
I suspect that this time, price drops will be greater and quicker, given that size of this bubble price runup, and given the easy flow of information through the Internet. Today, it is a lot easier to get the herd of investors pulling out compared to the 1990s. Also, buyers will be better informed about the inventory build ups and price drops, so they will be far less likely to “catch a falling knife.”
Interesting that Shiller mentioned Pheonix as one of the most spectacular cases… In his book “Irrational Exubberance” with the RE supplement he uses Pheonix as an example as a normal slow growing appreciation rate along with inflation…
I guess things really have taken off in Pheonix in the last year and a half
Pheonix took the speculation mantle from Las Vegas precisely during that time period. The get-rich-quick seminar gurus used Vegas as an example of what to do, then sent the little lambs all over, including Phoenix, Boise, Ridgecrest, etc.
Yes, Phoenix’s metoric rise has been in just the last 18 months (mid-summer 04), as soon as the speculators refocused out of Las Vegas and SoCal. I’ve tracked the Phoenix market very closely.
SoCal prices have risen twice as far as in the ‘90-’95 swing (Shiller calls it the ‘89-’97 event, no matter). If that was 40% then this time we could see 65%. (Trust me, I checked the math, that’s how percentages work.)
Robert, you are a nut. Speaking of nuts, do you recall anyone, say, six years ago today, predicting a 90% drop in the Nasdaq Composite Index? That could never happen.
But the NASDAQ only went from 4300 to 1500 or a 65% drop. 65%? Where did we hear that?
Actually, it went from 5132 on 03/10/2000 to 1114 in October, 2002. My math stinks, but that’s gotta be in the neighborhood of 80%.
Cycle?!? But this isn’t a real estate cycle. . . it’s different this time! Real estate only goes up! We have to buy now before we are priced out forever!
(Sounds even more ridiculous now than it did a few months ago - doesn’t it?)
Shiller is the only one that I would give credence to his comments. He is pretty much in the loop on this massive bubble.
topic 1980s vs 2006-?
that’s the big question
direction has been answered
I’ll second that.
Shiller is a real bear but I do heed his warning…I have been looking in the central valley in California for some land…I want a property that I can build 4 or 5 houses on one of which will be for myself…You would be shocked at the amount of “Land Deals” that have come on the market in the last 30 days..Maybe 10 x what I saw in late 05…
I learned something long ago (the hard way in 1981) and that is this; “When the Elephants dance, the mice get crushed” It will be no different this time…Karatz (K&B) is not that worried because they no they can compete..Their basis in thye land is cheep and they have the deep pockets to “Buy Down” loans to attract what ever remaining buyers there are..There =remaing land they will just put on the shelf until next time..
The middle or smaller developers are toast and if you bought in one of these developments and you need to sell, you are toast too….
Anyone who bought in the Central Vally land will be crushed, including the big home builders. They have overpaid and will never recoup one dime of their costs. I guarantee that. You can’t build homes on $100k per acre land that people can actually afford.
I disagree. You can easily build 4 BIG homes on 1 acre and still have good yards, and therefore the cost of land in the house is $25k/house. If you are willing to do more densely (those no-yard places), you could easily do 6-8 houses+/acre.
Thus even at “overpaid” central valley prices, the cost/land is such a small part of the house that it doesn’t matter much.
Yeah, and the city gives you roads and sewers and the nice electric and gas companies run services out just to get your business and the EPA eats the cost of endangered species surveys and… Get it? This isn’t about houses per acre this is about everything that goes along with houses; schools, fire stations, offramps, etc.
Thats correct Robert.
But a lot of the stuff is actually paid for by the builder, not the city these days, and with Mello Roos and similar games, the builder & city can stick a lot of the costs to the homeowners down the line…
As long as people are willing to commute to 2 hours to have their 3000 sq foot homes, you will see more developments in the central valley, and the builders will still be able to make (at least some) money off of em.
They’ll stick it to you, and the bigger builders are better able to handle the costs. A friend used to subdivide small parcels in the Valley and is no longer doing this because of all the other increased costs and required improvements. The dirt isn’t the expensive part, even if it looks like such a deal compared to SoCal.
Maybe the city or county will let you subdivide, maybe not. Many of those land deals are just looking for greater fools.
Builders don’t pay for anything. ALL costs are passed through.
Isn’t this “soft landing”/”buyers market” crap getting annoying.
It is insane to refer to this time as a “buyers market”, hell we are just at or passing the peak prices of RE. How the hell can they (with a straight face) say buying a home at the most expensive time ever is a “buyers market”?
Really sick of the damn media and Gov lying to us in order to have us spread our legs for their swift repeated kicks to the our nuts.
Don’t mean to go political, but I now believe that those in power are truely trying to crush the government so another will take its place. There is no possible way out for our economy as long as the Gov insist on promissing (SSI, MedC, Drugs, Peace in Mid E., etc.) everything to everyone on borrowed money. Very soon our credit ticket is gonna get punched by the world (oil bourse) and the real pain will begin.
Makes me fear owning anything denominated in US dollars.
Do you guys think the foreign companies traded on out exchanges will avoid neg. effects from dollars collapse? Specifically Canadian/other foreign mining companies & foreign asian banks traded on our exchanges?
Keep raiding the treasury in the name of “tax cuts” and see the result?
But shhhhh! Don’t you dare say who the primary benefactors are or you will be accused of resembling an old worn out phrase, “class warefare”.
10 years ago it was Democrats spending too much.
20 years ago it was Republicans again.
Both sides are required by their voters to promise/give more and more and more and more. And both sides are ultimately the same.
Nah. Bill Clinton was a GOOD Republican: He managed to cut the deficit to zero.
No, the economy did. Look, I’m not a partisan here… I won’t vote for either side but claiming “Clinton cut the deficit” is just as much of a lie as “WMD were the reason we attacked Iraq.”
Who would you rather give a tax reduction to 1) a crack ‘ho on welfare with 5 illegitimate children in a project or 2) a small businessman or independent employer who makes things happen and employs people? No question, eh? Remember, the people making the top 50% of income pay 95%+ of the income tax. The top 5% pay 35% of the tax. Infact the bottom 50% are negative with the earned income tax(Get a check from the government) and don’t pay any tax. Give me a break.
Ahh….. Another tax whiner spewing trite buzzwords makes me laugh. Spare the world of the old wornout excuses for the irresponsible excesses of hyper-capitalism. Those with money pay because they have money and those who don’t have it don’t pay.
Why wage slaves like yourself throw up hand wringing excuses for the more fortunate is truly is mystery.
Ben, will an “ignore” function be available soon?
no
AGREE WITH YOU COMPLETELY
We are two of many who have seen through the charade of trite catch phrases freely thrown around by the hyper-capitalists and fox news phoneys.
This econ is headed for the crapper and people are high-fiving each other because their POS house went up another $20K. My question to those idiots is how are their kids going to be able to buy a home in the future? Our govt is morally and financially BK!!
The “idiots” you refer to don’t love their kids. They don’t understand the meaning of the word. Their daily goal is to satisfy themselves at the cost of their children, community, employer (they don’t bother with Church). Why? Two reasons. Human nature is the first. The 2nd is we’ve bought into the hyper-capitalist lie that states:
Greed is good at any cost
Spending is really saving
Taxes of any kind are oppressive and should be illegal
Any attempts by government to level the playing field is now “government interference” and “liberal”
I could go on but regardless of who you are, you know exactly what I’m talking about.
Greed isn’t all there is to it…many of us Generation-Xers (most?) started in the workforce as company sponsered pensions were being phased out. Us X-ers also face the dismal prospect of having to fund the retirements of the massive number of babby boomers coming of retirement age soon…and with the fiscal mismanagement of the SS ‘trust fund’ (hah! IOUs!), our generation has to plan for the future with the assumption that we will never see a dime for all of the money we’ve put into SS. So forgive us if some of us try to make some extra money…
However, that being said, for the fools who flip and spend, or refi and spend, I say, you made your bed, now sleep in it. I’m just worried that the government will make me bail out some of them as well…sigh.
(PS I’m not a flipper, but I did flip a house that turned out not to fit my investment profile)
Question answered.
>>…many of us Generation-Xers
>Question answered.
What was the question that was answered? I’m so confused…
We see that.
our generation has to plan for the future
The government is going to tax the hell out of people when the baby boomers retire.
Solution: own your own business. Pay yourself first and whatever is left let the gov tax it.
So long as they hammer high income earners, it’s ok by me.
How about taxing consumption rather then income ? Our current tax system encourages consumption rather then investment.
SS is fundamentally broken, less workers vs consumers, something has to give. The only fixes I can come up with is a strong dollar or a huge jump in productivity.
‘ Any attempts by government to level the playing field is now “government interference” and “liberal” ‘
Its imposible to level the playing field, there are always winners and losers everytime a new rule is made.
I get the impression by level playing field you were looking for rules that are more favorable to yourself.
How about taxing consumption rather then income ? Our current tax system encourages consumption rather then investment.
————————-
You want the rich to perpetuate themselves, never working at all, never pays any tax for their wealth, and control the lives of everyone else. they could be as dumb as you know who and never give up any power or privilege to you, and you can be as talented as you are and still not get anywhere.
Wrong. The MAJORITY are not represented. The MAJORITY is my priority. Not the top 10%.
Rich:
I agree with a lot of what you say. I think you are smart to try and diversify out of $$$$ and into foreign assets. You might enjoy the latest book by Stephen Leeb - The Coming Economic Collapse. It will give you some good ideas of where to park your money. I personally have a lot in gold funds & etfs, and foreign mutual funds & etfs.
“Really sick of the damn media and Gov lying to us in order to have us spread our legs for their swift repeated kicks to the our nuts.”
Gee Rich, somehow I get the feeling that you didn’t buy into Dubya’s “Contract with America” nor his “Ownership Society” theme.
You are not familiar with this quote:
“The main trouble with democracy is that the people eventually realize that they can vote themselves the treasury; then you have anarchy.”
– H. L. Mencken’s Observation
Current politicians are only doing what the people have asked. If they spent less they would not be current politicians. They will become, or be replaced by, politicians who will spend more until this becomes impossible.
This is the way of things. Plan accordingly.
You can not have both ‘guns and butter’ unless you are her Hilleryness.
Gee. That was profound.
Shiller’s views are informed by theory and data. The other guys are just talking out their @$$es.
Actually, neither of teh others are…
The mortgage guy is saying 30% drop likely in many areas! How is that not very bearish?
As for the KB CEO, he really CAN ride it down to the bottom and still make money. Hyping things up is good from his viewpoint, but even in a down market, KB will make money, just not the Metric Buttloads that Wall Street got used to.
The more quickly this crashes the better it will be for the HB’s.
Sales have plummeted and the HB’s want a restart as quickly as possible even if prices are significantly lower. Once this bottoms out their will be money to be made just not at the same rate or in the same areas.
Read about Entire US Real Estate Market Falling - Should you buy or should you rent?.
” We have also included a long list of reports appended to this article to help your understanding of the Housing Crash of 2006. More than a year ago we published news that people in the U.S. were holding over $9 Trillion in home mortages - more than $3 Trillion of that sum in “no-down payment” mortgages. The latter have been pushed by banks and mortgage companies who knew well that the debtor would never be able to keep up with 2 separate mortage payments. Analysts predicted then that when the $9 Trillion Home Mortgage Debt busts - the shockwaves will flow outward, dramatically affecting the entire economy. If you follow this analyst’s (below) advice, in the U.S., you won’t buy - you’ll rent and if you plan to sell your home, it may be too late. - LMB “
Way cool! That’s Patrick of patrick.net. I kinda started over there and somehow found Ben’s site. Way to go, Patrick.
BayQT~
Interesting that Mozillo identifies Miami/Ft Lauderdale. That would have been my no. 1 pick also. At least in LA/SF, there are high paying jobs to theoretically support some of the prices. Not so in Florida.
Speaking of Mozillo - when did he “get religion?”
Wasn’t he denying much of what he just said not too long ago? I mean, how come he suddenly “sees” speculation he didn’t see six or eight months ago? Or a year ago, or more?
He said back then what anyone would have said if they headed the biggest mortgage lender in the country: that everything was just rosy. That’s just business for you. He was just squezzing the juice out of the shrivelling fruit, that’s all.
Not so in the San Francisco Bay Area either. I don’t have the figures from the 2005 report but according to an article in 2004, you need an income of $124,000 to buy a median-priced house ($560K) in 2003. The median salaries for a household at that time was $76,600. And even considering there are people under and over that salary….that ain’t affordable. Housing costs are outside the range for those with what I call a respectable salary.
In the city and county of San Francisco alone, there are three quarters of a million people. Not everyone has a high paying job. While there are some who do, there are not enough to support the ridiculous prices.
http://tinyurl.com/2tqkn
BayQT~
What you said. It does not make any kind of financial sense for the average home to be out of reach of people with average, middle-class, respectable salaries. When you need to be a superstar to buy an ordinary home (not a mansion!) something is way out of whack.
Only exceptional areas (with very high demand) can sustain such prices over the long run. Most places have to keep their housing prices in line with ordinary Joes and Janes; there are only so many wealthy people to go around.
Read about Feds play role in cheating real estate borrowers.
“Under authority of the Real Estate Settlement Procedures Act (RESPA), the Department of Housing and Urban Development developed a Good Faith Estimate (GFE) of settlement costs aimed at helping borrowers shop knowledgeably for settlement cost services. In practice, it provides legal sanction for lenders to cheat borrowers at the closing table.”
That is a decent intro article to understanding your settlement statement, but in some states the HUD1 must be within .25% of the GFE. And the broker/LO cannot change it. On a $500,000 +/-$1,250
What is the URL to that interview? The one Ben provided just sends me to a search page that does not seem to list the interview. Sorry, I’m lame.
KB Home is HQ’ed in Los Angeles and thus, every one of the top execs. lives out here (and has a strong conflict of interest in being honest if they think it is overvalued).
Does anyone really think Karatz is going to put down the market here (even though all of the KB Home developments are in the exurbs - precisely the areas that are going to bear the brunt of the pain)?
even though it hurts my head to read Stephen Roach, he’s dead-on with this assessment (I’ve posted part of it…the entire piece is at http://www.morganstanley.com/
“Suffering from the greatest domestic saving shortfall in modern history, the US is increasingly dependent on surplus foreign saving to fill the void. The net national saving rate — the combined saving of individuals, businesses, and the government sector after adjusting for depreciation — fell into negative territory to the tune of -1.3% of national income in late 2005. That means America doesn’t save enough even to cover the replacement of its worn-out capital stock. This is a first for the US in the modern post-World War II era — and I believe a first for any hegemonic power over a much longer sweep of world history.”
Now…I figure he knows a thing or two beyond what a guy representing a homebuilder and a guy representing a lending company.
I’m just sayin’.
Stephen Roach is a very smart guy, and has been one of the leaders in understanding why the U.S. economic ‘recovery’ was not matched with a concurrent jobs ‘recovery’. The short take on his theory is that there is a global labor arbitrage going on at a ruthless pace, with the migration of jobs to developing countries. Initially, job migration from the U.S. was limited to farming and manufacturing, but with the advent of the internet, increasingly ‘high-value’ (i.e., high education) jobs have migrated to the third world. Early on, we all have had our service calls taken by Indian support staff, but now these jobs include engineering, law, research and development, and even medical analysis (e.g., radiograms).
This ‘global labor arbitrage’ is responsible, in no small part, for the lack of sustained increases in U.S. wages, and also probably our negative savings rate. Ultimately, the extraordinarily high prices for real estate cannot be sustained without commensaturate salary growth.
But I can’t really do Roach’s analysis justice. Here is the web site:
http://www.morganstanley.com/GEFdata/digests/20060109-mon.html
awesome, lmg…thanks for the micro-analysis!
Ultimately, the extraordinarily high prices for real estate cannot be sustained without commensaturate salary growth.
Bingo! That’s what I keep trying to tell people when I decry the fantasy economics* of the current SoCal market. Yet somehow they just don’t see the obvious disconnect.
*Thanks to whomever coined and/or posted this phrase.
I am in your camp on this theory! Without sustained increases in wages and salary no one can pay P&I ,taxes,upkeep and a car full of ramin.
The housing bubble just kills whatever chance the US has left to keep the lead in engineering and sciences. Instead of staying in the US, many America trained Indian and Chinese scientists/engineers are heading home. The US boarder is open only to illegal immigrants but not to the legal H1B holders working in Boston or SV.
At the end, US scientists/engineers will have to compete with equally capable foreign peers and it just make those jobs even less attractive to younger generations. But is losing the lead in sciences and engineering an option?
If the US has nothing to offer to the rest of the world, how much longer can Americans live off HELOC?
This is my beef with the people who claim that flipping is just young people trying to get ahead and have the American Dream. Bullshit. Why must they have all of it by the time they’re 30. Selling overpriced assets to each other is not a sustainable career, nor is it productive. People always want the easy way out and yet when they stumble into some dumb luck as most of this has been, they never have the brains to take it and walk away. Very few will end up retaining anything from this experience, although most will brag til their dying day that they did.
Agreed, I can’t wait until this is done so we can get onto something productive. Even the Dot.bomb bubble, yielded productivity gains, new technology and a huge global fiber network.
This housing boom will yield a glut of stainless steel appliances and granite countertops. That about it. (Stainless steel the new avocado)
I kinda like stainless steel though.
yeah, but you can’t use magnets to put your kids’ artwork up on the stainless steel, so it’s pretty sterile…
as is, I agree, this whole housebubble scene. I just finished the truly fun read that was Thomas Friedman’s The World is Flat, and though he ain’t no economist he makes it very very clear that the outsourcing will continue. He’s generally very optimistic really (not on housing, which he doesn’t cover refreshingly!, or on US’s shortterm picture, really…it will hurt for a while to see jobs disappearing and salaries going down) but he also makes it clear that we should *worry* if we don’t stop turning out nothing but lawyers and MBAs. We could add ‘and people who make money selling each other countertops and soul-crushing debt’. We need to be working on innovating, we don’t get enough design and engineering degrees, we’re cutting money on science research, and we aren’t putting our brainpower into new ideas. you guys make extra good points that a combo of hardertoget visas and ridiculous living costs in the US are making those smart foreign students stay home, that plus the companies are leaving. One CEO type he interviewed for his book said that we’ve become addicted to our high salaries and now we gotta really start earning them. Instead we’re spending our energies and potential imaginative powers playing Monopoly. Yes, at least with the dotcom thing there was actual potentially (and actually!) useful technology being created and spread about.
Paul Krugman had a great op/ed piece in the NYTimes a few months ago, describing a visit from a Russian friend (I think) who was very taken by the U.S. Since he didn’t see any evidence of the production of real goods (i.e., manufacturing), he wondered if the economy was just built on selling houses to one another.
Krugman, being the Princeton economist that he is, launched into how unsustainable our economy was, largely because we were using false real estate gains (e.g., HELOCS) to underwrite daily expenses.
The imminent collapse of basic research and development that you describe is not something that will leave the U.S. economy intact. It is one of the few areas that the U.S. truly excelled, and one that is being decimated with substantial government cuts to the R&D budgets of NSF, NIH, NASA, NOAA etc.
I can add an ironic twist to Krugman’s story. I worked for a month in Russia during 1998. It was my first trip to Russia, and it was a crazy place. However, the observation that kept bubbling up was that Russia’s economic exchange with the West, Japan and China was demonstrably one way. Most of the things one could buy in the stores were imported. Nothing seemed to be made in Russia anymore, particularly processed foodstuffs.
Halfway through my visit the Russian ruble crashed to less than half its previous value. In a tiny village in the hinterland the price of everything in the grocery store increased by a factor of three. Overnight.
So things can happen quickly.
I read an article (in BW I think) a couple years ago. Economists always tend to predict median results. So they say the ecomony will grow 3% next year. Except that it is much more likely to grow 2 or 4%. They just don’t go out on the edge.
I think the same is true with these predictions. I could predict a 10-15% drop, because in housing that is almost invisible given the wide variety of houses (at varying prices) that come on the market.
Shiller has a vested interest in being on the edge. We’ll see if he’s right.
Your correct Weaver…
Seen it many times before…The big guys know exactly how to manuver…Look @ Pulte…$75K off on a 400K house…They are still making a boat load…Problem is the poor bastard that prucahsed around the corner 6 months ago is probibly under water with his mortgage..If he loses his job or makes less money than he anticipated he may just decide to WALK !! Circa 1981, 1991
10-20% drop? LMFAO…The ‘89/’90 bust didn’t involve a smidgeon of the hocus-pocus mortgage financing racketeering which has gone on for the last 4 years. This time it really is different.
Actually he said 30% in some areas. And that’s reasonable depending on how you define SOME… i f much of California, Florida, Arizona, Nevada, Massachusetts is SOME then that’s reasonable. Also if you’re not taking into account inflation, 30% sounds close. And hey if it goes to 35% you weren’t far off, right?
Yes, I know I’m giving him all the excuses in the world, but no more than he would give himself…
It won’t just be the defined ‘bubble’ areas that will drop precipitously.
There are lots of backwaters with flat or slightly increasing prices which should have declined the last few years, given the local economies. Despite their seemingly innocuous prices, they’re still as bubbly as many more visibly ‘hot’ markets.
The high tide has floated all boats, and the ebb tide will ground them.
this is exactly right.
though the stock market is behaving like it is 1998 again.
Thats not true…S & L crisis is what caused it…Rampant speculative lending became a house of cards…
KBH’s Karatz said, “In some markets, 10% to 15% of buyers were speculators. You take them out, and the market drops 10% to 15%.”
I think he might be using the “new” math. Asset pricing doesn’t work like that especially in speculative frenzies.
Take the late 90s tech/telcom stock bubble. Most Americans were on the sidelines watching. Most of the conservative money-managers and fundie guys weren’t playing the bubble either. So who was buying JDSU at $200/share? It was the marginal 10-15% of shotgunning hedge funds and amateur daytraders buying and selling the same stocks back and forth to each other, and driving the prices higher and higher and higher.
What happened when these hot shots bailed out? Did the stocks fall 10-15% because 10-15% of the participants left the game? No, they fell 80-99%.
I’m not saying RE will fall anywhere near as much. But the scenario is the same. The marginal speculative players in RE drove prices up far more than 10-15% because they were buying everything in site, leveraged to the hilt and willing to take risks most folks wouldn’t dream of taking.
When you remove these speculators from the equation, pricing hits an air pocket that—in the most bubbly markets—represents far more than 10-15% of price inflation.
Yes indeed and the survivors learned to play the downside. You can’t do that in RE in such a direct way of course but the ultimate outcome is the same. The pros will scoop up the remains when it all gets puked up and will turn around and sell it back to the next generation of suckers.
Someone doesn’t understand leverage and margins: “10% to 15% of buyers were speculators. You take them out, and the market drops 10% to 15%”
There isn’t a 1:1 corrspondence; RE is highly leveraged real state, isn’t very liquid and priced at the last “comp”. Lose 10%-15% of the buyers/sellers and the bottom can fall out. I’m not saying it will happen. I’m just saying his math is incorrect.
Well I see my comment on 10%-15% was said by others better than I previously. I should keep my trap shut. I guess we all see how ridiculous the “10%-15%” drop was.
Responding to hd74man
Not true…The 1991 collapse was caused by all the speculative lending by the S & L’s…When the chickens came home to roost, there were no buyers left…It all came down like a house of cards…
what about the chickens?
Though I do not believe the chicken bubble has been inflated by the credit situation… I would venture to say that most, if not all, of the chickens purchased today will be worth next to nothing in 5-10 years… and I would expect their worth to only continue to decrease even with inflation.
Many good comments above. Let me add that in the frothy markets, 10-15% speculator position would be a welcome decrease from the 25-30% of speculators buying in the market. I’ve seen numbers running even higher. What does that mean for those markets?
I just walked from 6th Street to 65th Street in Miami South Beach today. Every other place is being built or restored. Karatz really thinks it will take “3-4 months for some of the overhang to be sold???” I’m no real estate whiz, but my 120 block walk today tells me that’s impossible, even if the market was continuing to boom, which it’s obviously not.
I caught a couple of episodes of Flip This House last week, hadn’t paid any attention before that. They make it look easy, fun, and foolproof. The profit figures alway leave out the selling agent’s commission. The flippers are 20-something trendy go-getters who think they’ve invented the wheel. They hire all the actual work out. At the end a RE agent comes in and praises them up and down. I wonder how many flippers got inspired to go out and do a flip based on the show- lots I bet.
SoCal is gonna go down b/w 8% to 12% (Conservatively) in 2006. Lot of buyers are gonna get scared and the decrease will worsen in 2007 to b/w 18% to 20%, which will also lead to a recession. This is a long term trend that gonna take many years. Eventually, it will come to around 45% to 52% of the current value.
have people seen this homeprice comparison tool?
https://secure.coldwellbanker.com/request/CBDocument?QMLclass=FrameViewer&lpage=%2Frequest%2FCBDocument%3FQMLclass%3DQMLViewer%26qmlpath%3D%2Finfo%2FinfoCenter%2Fmenu.html&rpage=%2Frequest%2FCBDocument%3FQMLclass%3DHPCI
have no idea what it’s based on, but I was rather depressed to see that the 300K houses I’m looking at here in old ann arbor would be just 238K in Phoenix! well, that’s a 2004 comparison, so probably useless now..
but it would take over 900K to buy it in Santa Monica, probably 1.2mil now!
and it claims I can buy one in Miami for a mere 447K, but again that’s probably turned into 600k now..
cheers…
Flip this House will be changed to “Dump That Shitbox”