Will We See An Echo Boom For The Housing Bubble?
Several readers discussed the concept of an echo boom for the housing bubble. “Will we see an ‘echo boom’ sometime later this year or next year? I wouldn’t be entirely surprised to see a scenario with an echo boom (i.e. suckers rally) in 2007. Echo booms are not uncommon in bubble markets and are typically characterized by a boom > small crash > false bottom > shaky boom w/a smaller peak > full crash to the bottom. It happened with the NASDAQ in 2001. It also happened with the 1929 market crash, where the Dow Jones increased by 38% between Nov. 1929 and April 1930, before continuing its crash.”
“If we combine modestly falling home prices in 2006 with interest rate cuts in late 2006 early 2007, it could bring in some buyers priced out/waiting on the sidelines that ‘missed their big chance the first time around.’ (BTW Don’t catch a falling knife!)”
Another sees it in stocks. “It is happening now with the Dow before it continues its crash…it’s just that this time the time scale is so large that most people don’t recognize it. When the housing market goes, the stock market will, too.”
“The crash in the 30’s took 3 years, and we don’t know how long this one will take; it could take longer or shorter, but it is important to know that a crash is coming. Some people on this blog have enjoyed the benefits of the bear market rally, and that is great for them, but I think they should consider getting their money out now before the next phase of the bear market begins.”
Another asked, “I really enjoyed your post. I wondered how much you think the falling dollar will change historical bubble experiences.”
The answer. “The dollar isn’t changing the bubble experiences, the bubble is changing the dollar. The RE bubble has increased the money supply and put “spending money” into the hands of people through refinancing, and not earnings or an increase in real wealth. This increase of money supply caused by the bubble is a large part of what has caused the dollar to drop in my opinion.”
Another added, “The market has been rallying since negative news of R/E has been seeping out. Perhaps the market will surge AS the prices decline (as cash quickly pours into the market) then they both may fall in unison (as investors pull out cause of overvaluation of stock values).”
One reader think one echo boom has already occurred. “I think that’s what’s been happening in San Diego since 2004. The market was through the sky until summer 2004. In the fall, inventory really piled up; listings have been up YOY and sales have been down YOY ever since. We had a mild spring bounce in 2005 which brought prices back from negative territory (from peak through winter), and it’s basically stayed there (pretty flat) ever since. I think this was our DCB. Lots of complacent buyers who believe the ‘high plateau’ theory. Next step is off a cliff, IMO.”
Echo Boom? I suppose if you want to call it that. RE cycles seem to last at least 10 years. Of course there are purchasers on the way down–I may be one of them. We’ll hear “the market has now stabilized” a hundred times before we hit bottom. But an “echo boom”? I wouldn’t call it that.
“Echo Boom” = Dead Cat Bounce
entirely dependent upon the lending market, if defaults, carry losses and buybacks effect the overall mortgage market, the market is toast. remember the majority of the players are amateurs using high leverage, like buying stocks on 100% margin.
“When the housing market goes, the stock market will, too.”
This is bull.
A depressing number of posters to this blog seem to think the only worthwhile investments are gold, bottled water, and spam. The stock market may well drop 30%–that always possible regardless of the outlook. But there are numerous factors affecting the stock market. The residential RE market by itself does not have the leverage to bring the stock market down with it.
I keep reading the smart money that went into real estate in 2001 is now coming back into the market.
But by the time the average person reads that, does it mean the smart money is already going yet somewhere else?
Ah but it isn’t the “RE market” that’s going to take the hit, it is the “financial markets” and they certainly have the power to take the stock market with them. Another two factors lost; some, probalbly a lot of fund flows is supported by home equity spending and second when times get tough people will sell their stocks before their house.
The market’s hanging by a thread even now! Hell, if the head of the NYSE had a “bad hair day” the bottom could fall out.
IMO, RE has been the primary driver of the US consumer, and hence, the US economy over the last five years.
Consider the fact that without the direct and indirect effects of the housing market, GDP growth would be zero. That’s over the last five years. Now look forward. What’s changing? Well, the structure of the mortgage market and US economy is completely different today compared to prior busts in housing. ARMs and option-ARMs have facilitated a significant portion of purchases over the last few years, and as much as 40% of purchases made last year alone. Couple that with with miniscule downpayments, bogus appraisals, and a negative savings rate, and you get the picture of a consumer stretched financially beyond belief. Why were people using ARAMs like crazy, why were downpayments and piggyback loans the rule of the day, why is the savings rate negative? Because people see the housing prices moving up and they want to either get rich and flip stuff or they want to get on board because they are paranoid prices will continue their rise forever. The big problem, however, is that folks don’t have the money to handle a downturn in house prices, much less the purchases to begin with. Real income growth is nil! And house prices are between 40% and 80% overvalued. What’s going to happen when prices come down 20% in CA, MA, NY, FL, and VA/DC? Who’s going to be able to refinance their ARM then? Who’s going to be able to make higher monthly payments then? Remember, nobody is saving anything and real income is flat.
The housing market has been the driver of the US consumer, and the US consumer drives over 70% of the US economy. As housing prices go lower, the big homebuilders will continue to dump inventory on the market. Those houses will be competing with financially strapped owners who want to sell, too. But the builders have to sell. They have to answer to their shareholders who want EARNINGS. So they’ll lower prices and force Joe Flipper to sell lower, too. The same competition we saw on the buy-side on the way up will be reversed on the sell-side on the way down.
So as house prices come down over the next few years, the consumer is going to pull way back on spending. He/she has to, they don’t have a choice, they won’t be able to refi or whip out a new HELOC or credit card. That means retail and tech will nosedive because discretionary spending is gonna dry up, and the banks will nosedive because of the mortgage mess, and the oils will nosedive because the economy is slowing, and the broker dealers will…
And it’s all because of the massive leverage used to buy houses at prices levels that have outpaced income and savings growth by many, many multiples.
Your “animal house” post on Big Picture was priceless. Still makes me laugh. I keep thinking of the parade scene as it pertains to all of the real estate bulls, when Kevin Bacon is trying to calm the stampeding crowd “All is well, please remain calm, all is well!” … as he gets flattened.
Excellent analysis. Looking back at past booms and busts, the worst crashes occured when the bubble was fueled not merely by speculation but by massively over-leveraged speculation.
In the worst crashes, the outcome is not limited to the disappearance of paper profits, but also manifests itself in massive debt, bankruptcy, foreclosures, etc. which drag the economy down for years afterward.
The resetting ARMS will make the crash relatively quick, but the aftermath could last for a decade or more.
Hedge funds blowing up, derivatives imploding, foriegn investment dollars vanishing and the dollar dropping.. This will not be pretty for anyone. Perhaps those that have no savings and negative equity when they lose their homes will actually end up being the ones who lose by far the least — by definition, since they had nothing to lose to begin with!!
Agreed. People will spend less, corporate profits will be down, job cutbacks, fewer or reduced contributions to 401ks and IRAs - a negative cycle that feeds on itself. People will finally stop having that Robin Leach voice over in their head, thinking the world is their oyster due to overpriced RE.
The post about the stock market going down along with the RE market was not meant to imply that I thought that the RE market would bring the stock market down all by itself. The stock market began to go down 6 years ago because it was due for a major correction following the largest and longest stock market mania we have experienced in this country, and it still would have had to finish the correction whether there was a RE boom or not. The stock market has only gone through the first stage of the correction. The stock market and RE markets will both be affected by the other as they both will be in a falling phase at the same time, but each of them alone still would have fallen. This, of course, is my opinion, and I don’t have any problem with people disagreeing with me if they feel that I am wrong. One of the nice things about this blog is that it is a place where people can read various opinions.
Keep in mind that the most bullish periods historically for stock market gains are mid term congressional elections and October of those years for buy points. I am in agreement the RE is an accident beginning to happen, but the stock market after what could be a sharp selloff in the next several months will be presenting a major buying opportunity due to this above mentioned cycle. Rising interest rates have been bad for stocks historically and that will cause this selloff that we are on the verge of. However, after that OCT should be a great buy point give or take a couple of weeks. As to the macro view of what will happen over the next several years, I have no idea. I am a short term futures trader so the next 3 to 6 months is what I focus on, and this buy spot should be good for itleast that long of a move.
People exiting real estate in mass could exacerbate this move it it occurs as money could get shifted back to equities, but this move does not require that.
major buying opportunity - I doubt that:
history shows that the first 0.5-1 year after the FED stops tightening is on average BAD for stocks. If I remember correctly, the decline in the SP500 in the first year after the tightening stops is 10-20%.
There is an old market rule from the industrial boom of the early 20th century. When the blast furnaces aren’t lit is the time to take long positions. I’m still a believer in that. I’ve seen nothing but sluggish growth in capex spending of domestic companies. Yeah, their profits are up I believe mostly due to M&A activity, not productivity. Is now the dark times when the blast furnaces aren’t lit? Does the 20th century investment paradigm hold true in the 21st century in light of globalization? Don’t know but the fact remains that ROI over the long haul is long positions in domestic equities.
“history shows that the first 0.5-1 year after the FED stops tightening is on average BAD for stocks.”
Because the Fed has a history of not easing until a slowdown or recession becomes manifest.
to mad_tiger:
yes, that is a likely explanation (although I have read it applies in Europe just as well).
Just thought I should mention the fact because some posters see the end of tightening as an investment opportunity - which it isn’t in general, unless you choose the short side.
A depressing number of posters to this blog seem to think the only worthwhile investments are gold, bottled water, and spam. The stock market may well drop 30%–that always possible regardless of the outlook. But there are numerous factors affecting the stock market.
The “sane” valuation for stocks used to be a price-to-earnings (p/e) ratio of 7 to 1, or a P/E of 7. In other words, stocks were valued at seven times their pre-tax earnings. The current average P/E is something like 38. So your “stocks may drop 30%” assertion seems wildly optimistic to me. If they correct back to historical (sane) norms, we could see HUGE percentage drops in stock values, and their earnings would likely suffer as well. Plus, a lot of people are going to be cashing in their 401(K)s to keep from ending up on the street, once things really start to turn ugly.
During the Great Depression years, Helca Mining (HL), one of the oldest publicly traded stocks on the NYSE, supposedly increased its value sevenfold, while most stocks (that survived) didn’t reach their 1929 levels until the late 1950s (and adjusting for inflation, much later).
I think that Helca Mining and other mining companies did well during the depression because the price of gold was fixed by the government and could not fall as other commodities did.
How about RE declining at the same time China divests itself of u.s. investments, along with spiking oil prices?
Umm, I think thats gold, water, and gummy bears. We’re not animals.
I tend to agree with you on this. At least for tech companies that make most of their money overseas will do very well. Dollar’s fall will make their overseas earning look really good in dollar terms.
We may not stand head and shoulders above the rest of the world any longer but economic disasters here echo around the world. Tech and such will be sensitive to aownturn in the geeneral economy that will be caused in part by the housing pop.
Oh?
1. Record high real estate prices fueled by record low interest rates
2. Record high levels of speculation by investors & 2nd-home buyers
3. Record high consumer debt
4. Record low savings rate
5. Record high level of home-ownership
6. Extremely lax lending practices
7. Rising interest rates, ARM resets coming soon
8. New Home building continues at record levels
9. Rapid increases in new and used inventory on the market
10. Sales of new and resale homes on the decline.
1 thru 10 = Real Estate Crash
11. Record US Deficit $9 Trillion
12. Record Trade Deficit, add $60 Billion /month
13. Record Current Account Deficit
14. Present value of unfunded US liabilities (Medicare/Medicaid/Social Security) = $44 Trillion plus
15. Record Low US household savings rate
16. Record High Consumer debt
17. Record High US Stock market (DJIA)
18. Record longest bull run in 70+ years, way overdue for 10% correction
19. DJIA P/E ratio well above historical mean
20. Fed raising rates, always goes to far, doesn’t have a clue etc.
etc.
Real estate crash here now. Consumer on a cliff, ready to jump. Government bankrupt.
Yep, everything looks good. Buy Stocks.
Hmmmm… just me maybe, but I detect a note of sarcasm.
#’s 11,12,13,14,17,18 and 19 would exist regardless of the housing market. #20 is a mixed bag.
I guess the IMF made up this study, then…
(CAVEAT: PDF FORMAT)
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf
And more on the subject of asset busts from fool.com:
“The existence of a real estate bubble matters to individual investors on two levels. First, it matters on the macro-economic level, because the bursting of a property bubble will have a broad detrimental impact on the economy and the stock market. But it also matters on a micro-economic (or household) level, as the bursting of a real estate bubble can significantly hurt the average household balance sheet.
On the macro-economic level, the data is compelling. The International Monetary Fund (IMF) published an in-depth analysis of equity market and real estate crashes in its April 2003 edition of the World Economic Outlook. In this study, it concluded: “Housing price busts were associated with output effects about twice as large as those of equity price busts. The worse case output effects exceeded those of equity price busts by a substantial margin. Moreover, the slowdown after a housing price bust lasted about twice as long.” The average real decline in prices in a housing market crash (30% after four years) was found to be less than for a stock market crash (45% decrease in equity prices, on average, after two-and-a-half years), but at the end of each of those periods, GDP (or “output”) had fallen 8% after a housing bubble burst compared to 4% after a stock market bubble burst.”
http://www.fool.com/news/commentary/2004/commentary040428sh.htm
I know this time is different, but…
Maybe nobody told you this yet, but the 1929 stock market crash and subsequent 16-year depression was preceded by a Florida Land Boom that went bust around 1926 (brought on in part by lots of hurricanes). But this time is different!
“Echo booms are not uncommon in bubble markets and are typically characterized by a boom > small crash > false bottom > shaky boom w/a smaller peak > full crash to the bottom. It happened with the NASDAQ in 2001. It also happened with the 1929 market crash, where the Dow Jones increased by 38% between Nov. 1929 and April 1930, before continuing its crash.”
Hear hear. I give you exhibit A: a chart showing the crash of 1929, accompanied with the (false and delusional) prognostications of the “experts” of the era. Note the quotes for 6-9 on the chart, where “experts” (cough) called a bottom - WRONG!
It seems that history is getting set to repeat itself.
http://www.gold-eagle.com/editorials_01/seymour062001.html
for those who missed it I’m reposting the recommended link from txchick57:
http://www.itulip.com/housingpriceregionscascade.htm
the European perspective:
there definitely is an echo bubble in the EU stockmarkets - some of them are up 100-250% after the bottom just before the Iraq war. Investor sentiment in Europe is even more bullish than near the peak of the dotcom mania. Will it continue? You bet, with unprecedented amounts of money flowing from the ECB into the market, there is no way this market will seriously crash soon (maybe some minor crashes on the way though). Usually, gains in the stock market in Europe translate into house price gains in the next 1-3 years.
As for the EU housing market, I’m getting the impression that an echo boom is on the way here. The ECB has signalled that it is not going to restrain growth by raising rates (it will no longer look at inflation). That applies to the housing boom as well - EU citizens will get all the money they want, at historically low rates (and crazy lending and leverage will continue without a doubt).
So I think the EU bubble will get a bit worse in the next years and certainly expand even further, unless we get some unpredictable event like China withdrawing completely from the US Treasury markets, a real oil spike or a new big war in the Middle East.
the iTulip guessing graph is worse than useless. Everything to the right of point “a” is made up. In the end the “explanation” of the “graph” is nothing more than thinly disguised hatered of the exurbs. Shades of the long emergency.
yes, it’s made up but it is a model that at least for the march to the top sounds very plausible to me; it’s exactly what happened in many EU countries and which is still happening in the EU on a bigger scale. Nobody knows who this bubble will unfold but it is worth thinking about it now.
Of course the “model” to the left sounds plausible, it is real data and historical fact. That’s what makes the right half such an insidious lie.
if you have a better model of what will follow you are welcome
To me the value of the ‘model’ is what it says about regional bubbles and the mechanism how these spread over a certain time frame. I think that this is a valid observation, more so as it applies to the US and Europe just the same.
The author goes on to use this model in reverse for how the bubble might collapse. I mentioned in another thread that the driver for lower prices in the model (higher energy prices) certainly does not apply in Europe. With easy money as the basic bubble element, I think the bubble can only end by a worldwide end to easy money policies. We are not there yet, not by a long shot.
In the current climage of easy money, I certainly don’t believe there will be a quick crash.
Robert, how can you disagree with mean reversion?
I don’t disagree with mean reversion with two mitigating circumstances. First reversion to the mean adjusted for inflation and second reversion to the mean adjusted for product mix.
I vehemently disgaree with “charts showing the future.” The words for drawing “charts that show the future” are astrology, numerology, etc. Arrogance, hubris and wild predictions of the future are what got us into this mess.
Um, Robert… you do realize the graph is about “Home Equity Extraction” and not home prices, don’t you?
p.s.: IMHO, it may as well be home prices.
Anyone who thinks the echo boom will raise prices, forget it. The echo boom will slow the decline in prices. Who in 2007 is going to buy at a higher price than the last comparable property? Maybe they’ll take a risk and offer the same or only a few percent less but more after two years of freefalling prices?
Housing isn’t going to see wild swings for a very long time. Not until people forget just how illiquid housing can be. That’s a lesson that hasn’t even been learned yet.
you think so?
in Europe after some years of less-than-stellar growth, in some countries price increases are picking up again. Because there has never been a serious crash in the last 15 years buyers might feel more assured than ever about a free central bank put for the housing market.
I would hate to be this bag holder now that the bubble has burst.
http://www.rense.com/general70/gasbuyss.htm
I don’t think Abu-Dhabi RE is going down any time soon, esp. with peak oil upon us. $3.00/gal is now common here in CA. By this summer, count on $100/bbl and $4.00/gal.
“count on $100/bbl and $4.00/gal.” Not intended as investment advice? Don’t you think a general economic slowdown as a quarter of the general economy responsible for 40% of the jobs growth in the last 4 years implodes is going to cool demand?
U.S. oil demand increased last month by 2%, YOY, China 3.5% YOY.
As you can see, higher oil prices and a cooling housing market are not causing any decrease in oil demand.
Spare capacity to produce additional oil is virtually non-existant at this time– OPEC and non-OPEC suppliers are running flat out.
“Rationing by Price” is the new dynamic.
YUP..Cote is correct again…Check out the Sac business jornal site a few blogs down….The layoffs have already started at a time of year that the “STARTS” usualy explode…
but in that case, maybe you can first explain why the stock market there went down big time recently, with peak oil around the corner?
I think the same could happen then to the RE market (maybe a bit less because most of the RE investment is coming from overseas …).
The Saudi stock market corrected due to massive over-speculation.
However, oil prices will continue to rise due to supply/demand market dynamics.
so I guess the Dubai RE market can correct due to massive over-speculation as well. Just take a look at the flipping that is occuring there …
Even if they corrected, the Sultan wouldn’t be loosing any sleep.
Fuel prices have now accelerated from the new floor average floor price $2.30/gal. Get accustomed to the volatility. Gee… you don’t think that extreme volatility has anything to do with escalating demand and tight supply do you?
Actually, I don’t think there will be any “echo boom”. The value of real estate will slowly do down until it aligns with rents. Why? Because value of houses are currently based *only* on speculation (it is just a house, it just sits), while stocks might go up with better economy news.
The rents bottomed about a decade after the RE market during the depression. I don’t know why that was so, but I suppose that it was because when RE is dropping and many people have been stung badly people who are looking to buy for rentals take possible future price deflation into account when deciding the price they are willing to pay for a property for a number of years after the prices start to rise again.
I take that to be reason to believe that RE values will bottom at a lower point than expected merely by examining rental values.
I think we might see a small bounce of people 1) trying to get in while rates are still low (know that they are going up), and 2) people trying to jump in on the first wave of price reductions.
My opinion is, though, that with this much potential crash energy, there is not much that will stop a large downturn at this point. Look for example at all the inventory that’s online now. It would take a LOT of buyers to soak that up.
-X
Like I always say, show me a market -any market- that can sustain price stability though massive inventory growth. There are none.
-Bubble-X
BubbleTrack.blogspot.com
I agree that people will buy all the way down, but there will not be enough of them to prop up prices.
in EU inventory has been growing for years and still prices keep increasing (although not as fast as 5-10 years ago). I think a big part of the current inventory will never sell, but keep in mind that the average price is set by the properties that DO sell. At least in Europe, nobody is scared about a housing downturn yet and there are more than enough buyers to keep this market going for a few years longer - especially now that the ECB has signalled that they are nearly done raising rates (just like Ben Bernanke is nearly done).
NHZ - If the properties do not sell who is paying for them while they sit on the market? Just curious?
good question and I don’t have a definite answer. I think the same can be seen in the US now: there is trouble with the cheapest properties in some areas but average prices keep rising (but slower than before - just like in Europe).
It is difficult to get all the details, but my guess is that some people who already have a lot of RE investment keep buying extra properties (using their equity gains), or maybe the (relatively) increased transaction volume in expensive homes is pushing the average sales price up.
Demand for expensive homes has picked up quite well here recently, while the market for high end homes was pretty bad in previous 1-2 years. At the same time, there are serious problems with selling the cheapest homes.
to Nova_Fence Sitter:
just noticed that I didn’t quite answer your question.
I think nobody worries here (yet) about properties sitting unsold on the market. The effective cost of a mortgage in the Netherlands is 1-2% per year, and other costs including taxes can be as low as 1% (depending on area etc.). Most owners do not do any maintenance either so the total yearly cost is very low.
If someone is moving, for the first 1-2 years you can even get an additional mortgage for the second home that is effectively (after taxes) 0.5% per year. (And if you are not really moving, you can always tell the tax office that the move was cancelled for some reason).
During the previous 20 years, the lowest appreciation rate for homes has been +/- 3% yoy (and in many years it was around 20%). So the cost of having an unsold home - even when it is not used at all - is irrelevant relative to the potential gains. In my area there are homes that have been sitting empty on the market for maybe 5 years or more. It’s all about easy money …
I think we need really big price drops (like a sudden -25% or so) before people start thinking about the ‘cost’.
I guess in Europe the law of supply and demand doesn’t impact housing.
it will some time, but for the past few years it seems to have been suspended. It’s a common fact that you can easily see if you check the EU housing markets.
P.S.: another explanation might be that in reality inflation is around 10%, so in the past few years when average home price appreciation was below 10%, home prices actually declined in real terms, instead of + 5-10% you in the bubble years (decline not relative to wages, because those are nearly stagnant here - like in the US).
Housing bubbles are different. Housing is illiquid. The 1990 US bust took 5 years. The Japanese bust took 15 years.
For what it’s worth, there was NOT an echo boom in the granddaddy of all recent real estate booms–the Japanese boom that ended in 1990. Japanese real estate prices never went up after that year. Their best post-bubble year was in 1994 when the price drop was only -2%. My guess is that the lack of an echo boom is a transaction speed issue. Stocks can bounce because they are bought and sold instantly, and people can react instantaneously. They can buy on good news and sell on bad news in minutes, or even seconds. But houses can’t change hands that quickly. People can sign a contract to buy at a higher price. But by the time they close days or weeks later, conditions can change so that the buyer can back out. If prices start dropping after you’ve signed a contract to buy, who cares if you lose a 1% deposit if it saves you from a 10% loss? You’ve got a contract for a higher price, but it never closes, so the price never bounces. That’s one reason why, as mad tiger notes, real estate bull and bear cycles last so long.
To see the graph of Japanese and other countries real estate prices, check out this link
http://www.bis.org/publ/bppdf/bispap21i.pdf, see page 114
the japanese RE market started improving last year in the metropolitan areas; some people think this is an echo bubble …
as for house prices being sticky: the last housing crash in the Netherlands, around 1979, had a -40% drop in 1.5 years after a +/- 100% price runup over 5 years. So the drop CAN be quick.
The current Dutch housing bubble has seen a 500-1000% increase over about 15 years and is still growing. It depends very much on the economic conditions (there was no ‘easy money’ in the seventies here, people were speculating with their own money).
I am constantly fascinated when I hear the numbers for the euro-bubbles. They’re so sky-high…is consumer spending being bouyed by this RE frenzy as well? And jobs? I guess they’d have to be…
some things are much different in Europe. There is probably less speculation, but more government interference (more tax incentives and subsidies for homeowners) and less job growth from the RE business.
The Netherlands is a prime example of the relation between housing bubbles and spending; the OECD and IMF made a report about this two years ago as a warning.
When around 2001 the double-digit growth in average Dutch home prices changed into single-digit growth, the country went into a mild recession with a significant drop in consumer spending (despite unlimited amounts of easy money!).
And the Dutch economy went from one of the very best performing (+/- 1990, just before the boom started) to the worst performing of all 25 EEC member states. And we are not even talking yet about a decline in home prices …
So the Dutch economy is strongly dependent on housing, but the mechanics are a bit different from the US.
One reason that some EU bubbles (especially in Netherlands and UK) are bigger is that they are older. In the Netherlands the double-digit growth started around 1993 and in the UK around 1995.
I would agree with the statement that we are already having an echo boom. Prices for 1M+ properties hit their peak during Summer ‘04. My wifes parents have a home in Dove Canyon that could have been sold easily for 1.2M in Summer 04′ the same homes are selling there for about 1.0-1.1M after going for just around 995K at the end of 04. In Ladera Ranch, we found townhomes selling for 450K in Feb 05 that are now selling for 500-550K, These homes were 550K-600K in Spring/Summer 04. Prices took a hit in the fall of 04, but rallied back in Spring 05. The median price in the OC was 582K in Jan, it has gone up to about 620K today.
I think this is the echo boom, because the sentiment has changed from Spring 04, it is more cautious, just still overly optimistic.
Only time will tell.
OC #’s:
Home sales to March 27: Prices +8.4%; Volume -25.1%
Fresh DataQuick data strongly hints that March was the fifth straight month where the volume of O.C. homes sales couldn’t match the previous year’s sales pace.
If the $622,000 median price for the 22 business days ended March 27 holds as the final March figure, it would eclipse December’s record of $621,000. However, the 8.4% annual appreciation rate would be the lowest since November 1999.
I think mid 2005 was the echo boom in most markets . With this much inventory in most markets I cannot imagine that the realtors can get a higher price rally going this season . When you keep in mind that 40 to 50% of the sales last year were speculator driven,( that was the echo boom market ).
I’m in agreement that what shows up in stock market charts as an “echo” or “dead cat bounce” — is what in real estate markets would be identified by rising inventory and rising prices. (Last summer through this spring.)
The illiquidity of real estate “smears” what would be humps and valleys on a stock market chart.
The stock market while not cheap historically, will not correct a lot. (I hope - fingers crossed) Especially with the decrease in dividend tax and large companines increasing payouts. There is just is n’t any other game in town. Most of my $ is in the market - (has been for years) / cash. Sold my house last summer and have been renting.
Extension of the dividend and LT cap gains tax @15% is very much in doubt especially if Dems do well this fall. Election year uncertainty definitely is a factor that could drive the market down.
Good point Mad Tiger;….My associates & I have been discussing this at length….
The US government and Fed are doing everything they can to prop-up the US dollar, the stock market and the “American Dream” of home ownership:
1. Tax preferences for homeowners via the mortgage interest deduction and the cap gains tax.
2. Lower tax rates on dividends and LT cap gains.
3. Increasing IRA contribution limits and increasing the FDIC insurance on those accounts to $250,000.
4. Increasing Fed funds rate in an attempt to stem any flight by holders of US Treasury debt (primarily China, Japan and Middle east)
See post above regarding stock comments.
Take your chances, but “hope” is not a good strategy on which to rely. To some extent, you are right to say “There isn’t any other game in town” except cash, TBills, Gold, F&C real estate…
Unfortunately the buyers are going to be out in force in some areas as prices drop because they truly believe that they are buying at a discount and that prices rises will resume shortly, especially if interest rates drop.In Monterey County RE’s are telling people that there is limited building and prices will only go flat and then back up. People here really believe that and if you tell them different you make an enemy. Problem is only 7% of the people can ‘quote’ afford to buy even if values drop 30% and they need to drop 100% or more for most people to be able to make payments and have any standard of living worth while. Many people are leaving the area because they can’t even afford the rents, plus there is no job market. Those people who bought here because it was cheaper now have to pay more for gas to drive into San Jose and will be forced to sell. More houses going on the market today and some are being discounted but in the $5000 to $10,000 range.
“As interest rates drop.” Sure “interest rates” will drop. That’s going to be the only tool the Fed has but “mortgage rates” are not going to drop. There’s going to be an inflation and risk premium and tight lending.
I don’t think the FED will be able to use that tool of lowering interest rates in order to preserve the dollar. And you are right mortgage rates are only going up. The 10 yr note has been selling off and it will continue to do so. The inflows especially from Japan are falling off pretty substantially. The FED seems to be giving signals it does not want a strong housing market due to the risk of inflation. I have posted on this blog that I believe the FED wanted the bubble to pop last year and was caught off guard by the “carry trade” They did not expect the yields on the 10 yr to be going down at the same time they were tightening and they also did not expect the aggressive mass marketing of suicide loans by lenders. Unlike Europe our Fed has a policy of fighting inflation first and mopping up bubbles after they implode. They had the ability to lower interest rates after the Nasdaq crash because Europe and Japan had extremely low or zero interest rates and Japan was pumping money like crazy. They don’t have the ability to do that now. Even though Europe has paused and Japan still has zero interest, the dynamic today is totally different than 01. The dollar is King, housing is going to be a casualty.
That’s the key right there — tighter lending means there’s NFW we see anything even approaching the length or gain of the typical “dead cat bounce”. If you just barely didn’t qualify in the past six months, getting a bigger (i.e. nonzero) downpayment, getting a raise (2%?) at work in the meantime, paying off some debt, etc. still won’t help you next year. You’re in better financial shape, but you’ve only kept pace — at best — with the higher requirements of the lenders. Higher interest rates, a down-payment requirement, the end of liar loans, insistence on honest appraisals, etc., will keep you out again.
And it’s only the first-time buyer who is a potential buyer at all, going forward, IMO. In a declining housing market, your leveraged mortgage works against you if you try to trade up: Pretend you put 20% down on that $300K condo, which is being very generous by the lending standards of the past two years. Your condo drops by 10%, that’s $30K of your $60K gone. Subtract selling fees of 6% / %18K and you’re down to $12K when you’ve sold. Now that’s a 20% downpayment on nothing more than a $60K house. Nobody who bought in the last year will be trading up in the next year.
yeah, as a potential buyer with no house to sell and very likely to be deemed quite loan-worthy but relatively cash-poor, I still will sit on the sidelines until I am less worried about losing my downpayment. If I had 40% to put down and prices on houses I’d want to live in for a good bunch of years were close to ‘reasonable’, then I might consider getting suckered in, but given that I only have 10%-15% I’m willing to earmark for a downpayment, the risk of losing it all is too high and the potential payoff for taking that risk seems very very unlikely lately…
And tougher underwritting guidelines….
When will the Fed be able to lower interest rates, especially with oil at almost 70 dollars a barrel and its archnemesis gold looking to smash through 600 resistance? If the Fed were to indicate stopping at their next meeting equities would probably soar, but commodity prices will catch up with them later.
When Japan’s “asset economy” blew up the bottom took years to reach for housing because it was so out of whack with fundamentals. At the height you could have bought the entire United States for just the land in Tokyo. The cost of land in California is probably worth Japan now, but I’m not sure. My aunt bought her condo in Tokyo for roughly 600K, and she would have difficulty getting 300 for it now. With the median household savings at 115K, unemployment at 4.5%, and interest rates at zero (free money) you would think prices would finally start to rise in Japan, wouldnt you?
Conundrum….
my information is that prices of both homes and land in the metropolitan areas in Japan started rising last year and this trend continues. But in the rest of the country the downtrend is continuing, so maybe the averages are still declining.
Here’s, in my never to be humble opinion, what’s happening:
1. The Fed is alllowing the money supply to grow (cause for eliminating the M3) to avert the deflationary failure that occurred post 1929, lengthening the Great Depression . We are currently experiencing price deflationary pressures (good) which we do not want to turn into dollar deflation (bad) due to the lower production and labor costs from the Far East and the accompanying Wal-Mart effect.
2. At the same time, they are raising rates to contain inflation and reign in the cycle of loose credit (loose credit also occurred pre-1930 to prop up consumer spending). The Fed is intentionally causing a level of inflation (by increasing the money supply) to ensure that we do not fall into a less-controllable and more damaging dollar deflation (as in Japan) which inhibits capital investment and spending.
3. The by-product of the Fed’s behavior and our current account deficit is upward pressure on interest rates and a concurrently weakening dollar. History demonstrates that a weak or weakening dollar has a strong correlation with high commodity prices.
In conclusion, the Fed is seeking both to reduce liquidity in the form of the real estate bubble (and, unintentionally, the financial markets(MBS, ABS, etc.)), while providing money supply to inhibit dollar deflation caused by a scarcity of supply after the asset bubbles are destroyed. The Quantity Theory of Money is MV=PT:
M = the money supply
V= the velocity of money
P= the average price level
T= the total number of transactions
The Fed is increasing M (the money supply) as V (the velocity of money) is decreasing. On the other side of the equation, T (the total number of transactions) will likely decrease correspondent to V, resulting in a higher P (the average price of goods). So the Fed must necessarily create inflation (maybe hyper-inflation) to eradicate excess liquidity in the form of asset bubbles, and then deal with the inflationary effect after the fact. The dollar will remain weak and commodity prices strong in the interim, as they are inversely related.
the trouble with all this is that the real value of the currency is unknown, because the CPI numbers are heavily manipulated. Maybe the international housing bubble will correct by a huge depreciation of the currencies; depending on your yardstick you will see either a soft landing or even a continuing boom (measured in $) or a serious crash (measured in Gold).
http://tinyurl.com/mltx4
Echo Boom Specko Boom….This has been driven by 50 year low mortgage rates that gave a loan to every yaho that could fog a mirror…If the job market changes….It won’t be pretty…
Echo Boom, Boom kaBoom……….
“Will we see an ‘echo boom’ sometime later this year or next year?”
Folks, beyond intellectual curiosity, who cares? If you sit down and do your homework and work the numbers you should be able to reach a conclusion, under priced or over priced. IMHO markets almost never price to perfection. So if prices drop then rally a bit it shouldn’t affect an asset’s intrinsic value. If the analysis is correct eventually the markets should catch up to the fundamentals. What happens until that time is just static or white noise. Prices, in the sort term (just like people) do all sorts of crazy unpredictable things.
Example, you find an equity/asset that upon analysis leads you to conclude its way under priced / valued. It’s trading below book, it has no/low debt, it has lots of cash, pays a safe dividend, generates cash and the business will survive and or come back. You buy it and then the price drops. Do you sell, hold or consider buying more? How does the fact that the price discrepancy has widened affect your analysis? If RE does experience an echo boom how or why should that alter our thinking? As much as i would like to buy a house, I’m not going to buy until it makes economic sense for me, whether that happens in 1 or 10 years.
bahahahahahahaha!
GRUB; “it makes economic sense”……..
That explains it…..All those purchases in Florida make “economic sense”….
This is an arguable point, but historically what bubble markets do as they deflate is become extremely chaotic. The transition from bubble to deflation to calling the bottom never happens evenly. The result is markets going up and down chaotically, but of course mostly down.
and this will be even more true for the housing market, because it consists of many local/regional/national markets with each their own factors involved (only the easy money flow can be considered a worldwide factor).
A dead cat bounce is possible but unlikely. There seem to be people who have been anxiously waiting for a deal and now will jump at a 10% reduction. Given the huge surge in inventory I don’t think they matter. But if a bounce shows up in the statistics the Fed will tighten rates another percent or two to make sure the cat is dead.
I wonder if the term “echo boom” was coined by some nmr spectroscopist convert to RE. I’d hate to think that any of us were driven to this fate…
I used to do some NMR spectroscopy long ago
I am in PHX area and I wouldn’t be surprised to see an echo boom after prices take their first 10-15% haircut. The reason is that I still see people around here thinking RE is the path to easy riches, and some I recently hear talking of getting an “itch to buy”. It’s that misguided bullishness and total ignorance of economic principles that will lead more people to jump in after an initial decline because they are thinking that “it’s over” and “I’m getting a great buy!”.
Can one of the posters who has insight into the bear market RE declines on the coasts in the early 90’s provide info on whether those markets had an “echo bounce”?
Another case of too much RE bullishness in PHX area:
I recently saw a sign saying “lean how to pay off your home in 5 years” with a phone #. curiosity got the better of me and I called and had brief discussion where they say that one can use notes to gaurrantee a 15% rate of return. I was sceptical, but still went to meet a couple guys to find out more.
I’ll spare the trivial opening details, as I asked the guys to cut tothe chase after they assumed I was naive and began explaining the “rule of 72″ to me. The Program, marketed by a LLC called “Optimus Assets”, which I understand is working in other cities such as Salt Lake City, does this.
They are looking for investors to buy 2nd notes paying 15% … and they suggest you take out your home equity and use that as the investment … since in 4 years, you will just about double your money and thus pay off your house (assuming you have a fair amount of equity … which is their target market). Of coures, their premise is based on the fact that RE only goes up, and since records have been kept in PHX area, it will only continue to do so because more people are moving here than leaving. Their sales pitch came falling down when I brought up the prospect of falling RE prices. To their credit, these 2 gentlemen did admit that this program woulnd’t work well if RE fell, though they did seem to believe they could find anohter buyer to take a lease w/option to buy if the 1st buyer, walked away from his underwater mortgage. For example, If one invested 20K to write a 2nd note on a 200K loan, if a borrower defaults during a 10% fall in RE prices (note these notes are INTEREST ONLY loans!) essentially wipes out your investment as the bank takes it’s 180K via a property sale (or less if goes into foreclosure). The 2nd noteholder is screwed in this case …. the 20K is lost.
I feel for the suckers they are reeling in on this.