All of you that have watched the Borat movie will understand the joke above but there is nothing funny about the current mainstream media bowing down to the housing blogs. If you have noticed, many housing bubble bloggers are now contending with the mainstream media (MSM) in dishing out the housing information. Not only is there a rush to the exits, but the media is now talking about issues many on the blogger circuit have been preaching for at least a year.
For example, Fortune magazine had an article published on CNN forecasting the top 10 markets to fall in the next two years. Take a look at the picture above, can you spot the pattern? Besides the fact that 6 areas are in California and 3 in Florida we see a coastal phenomenon. And of course who could forget the glamour and shine of Vegas but this is attributable from California Equity Giants™ (CEG) dumping their cash into second homes so it can easily be said that this market is the 7th wonder in California. Again, nothing shocking or surprising here but the thing that is odd is that the media is issuing double-digit prediction declines acting like Nostradamus without flinching. Look at Stockton California; it is projected to drop 7% in 2007 and 5% in 2008. Accounting for inflation and compound drops, this is quickly approaching 15% in two years. You can see this pattern repeated on many of the metro areas on the list.
What is more is that we are now seeing dramatic real world drops. No longer are bubble bloggers seen as mythical characters out of the Hobbit but as having some deep running roots in the forest of reality. For example, in Garden Grove a builder has slashed prices up to $140,000 in one year. The OC Register has published this article here: Falling Prices Trap New Home Buyers. Even more shocking is we are approaching at NASCAR speeds double digit drops in Southern California. In the Amazing Race to the Bottom™ we see that for November 2006 San Diego has dropped -6.9% and Ventura County has taken the lead with -8.2%. Quickly those double-digit drops that never seemed realistic to the housing talking heads is now knocking on their door like the ghost of Christmas past. Why do I get the feeling that many housing mafia syndicates are holding their breath for the glorious coming of spring and summer 2007?
Again, nothing of a shocker for anyone with a basic grasp of finance; if you can balance your checkbook you can see the headlight of this train coming a mile away while the rumbling of the ground signaled to your feet to take action. And what of the much discussed and famed soft landing™? Well, as you may have noticed the chit-chat of any soft landing was predicated on there being a safety net to fall back on; think of days in summer camp and the game of trust where you fall back expecting your friends to catch you. Well the housing camp is quickly realizing that their posse is busy putting out other fires. The fact that the CPI is 0 and the PPI is at 30 year highs is a conundrum. The yield curve is still inverted and tax receipts will fall for many states betting on overvalued property checks coming in because magician appraisers made values appear and disappear. Besides that, we are trying to fix the bleeding mess in Iraq that is sucking resources out of our own country. People fail to examine that cities in our own nation like Detroit are sinking into oblivion yet we are pumping billions into a war that is nothing more than an exercise in futility. Now we have to fix the mess we have created for nothing more than the moral imperative. What does this have to do with housing? A lot actually. The media is fixated on Iraq and anything and everything to do with war as demonstrated by the midterm elections. The last thing Joe Public is going to care about is some idiot Orange County boob that bought a home on an Option ARM mortgage when we have 125,000+ troops trying to figure out a culture war that spans two millennia. We are in Babylon as the richest man but somehow cultural differences do have a major impact on how one perceives freedom.
With that said, there goes the safety net. Keep in mind that 40 of 50 states did not experience a crazy glue sniffing bubble like we did. Many states did get a halo effect and went up 10 to 15 percent more than usual but not 100 to 150 percent like Bakersfield, otherwise known as Texas in California. Nothing against Texas or Bakersfield, love both places, but why is Bakersfield $200,000 more than Austin? In fact, Austin has a larger booming economy, same weather, better schools and better homes for your buck. Again, the California factor will hit hard in areas that don’t have the beach and sun below one hour away and only went up because geographically they were in the golden state map.
2007 will be an enlightening year for many. The soft landing talk is now gone. How will we deal with our economy in the face of a war that is draining our resources? And how will the public react when they realize the government cannot help their falling home prices? Do you think the sympathy of those in North Dakota, Kansas, Alabama, Minnesota, or even Wyoming will compute with the exotic tribal finance dance we are doing on the coastal nether-regions? Those in the housing game think that the government will step in and save the last dance for many but this thing has political implications. And just like real estate, all politics are local as well and this does not bode well for those hoping for the fabled soft landing.
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9 Comments:
As the housing prices fall, do you think rents would go up, down, or stay the same?
One view is that current renters will now be able to afford the lower-priced housing and jump in, keeping the demand (and price) of rentals relatively constant -- at least in the short term.
On the other hand, perhaps rentals go up because their lower-priced bubble-busted housing is purchased by investors for later resale and the displaced families add to the rental supply which increases rental demand and drives rental prices up?
Not sure what has happened historically...
anon:
There are a few things that may occur and you’ve mentioned them. If the real estate downturn is on a prolonged pace, we may see a rise on rental prices because the market will demand a premium. Keep in mind that the shift of the burden will move to those holding real estate so to compensate, they will need to charge higher rents for holding a depreciating asset; this will play well with a populous that will value renting more than owning. This is what is typically seen in most normal cycles if you look at rental data from the Census Bureau.
However, we are in a very unique real estate run-up like no other in history. We may see the above take place or we may see a double-whammy with both rental and housing prices decreasing. We will only see this occur if the housing bust will have a major economic impact. With revised GDP numbers out today, we see that housing does have an impact on the overall economy and we are merely at the tip of the downturn. The other scenario I see is that housing will continue to slow-down, rental prices edge up, the economy slowly begins to take the negative wealth-effect of a housing downturn, and then employment will force rental market rates down while real estate declines.
No one can predict this but reading the economic signs and indicators it appears we are heading down this road.
I live up the coast in PDX (Portland) and the market is still going up (although the rate has slowed considerably) and rents have bottomed out and are again on the rise.
But the most affluent renters tended to be the ones who bought homes, leaving behind a poorer renter pool today: how much will renters be able to absorb in higher rents?
San Francisco is in California. In matter of fact, it is across from Oakland, which seems to have made this top ten list. Yet, many city dwellers feel that SF is completely immune to this bubble. True, there has been a recent 25% sales decline in SF but overall prices are fairly stable. What are your thoughts?
Greetings from Canada!
Thanks so much for drawing that line connecting the Iraq (and by extension all of GWOT) and the problems in RE.
Several years ago I became concerned about the war's affordability and eventually concluded that certain oddities in RE financing (specifically Fannie's accounting magic) was helping the US gov't to believe they could afford these foreign adventures when in fact they couldn't.
Keep digging, there's lots more work to do before we finally figure out what's really going on.
Terry:
The good thing about market rents is that they reflect current income. That is, people that pay rent usually pay it out of their current earnings. This is also the case with mortgages but when you have artificially low rates such as negative amortization loans or option ARMS, you are deferring today’s payment onto future earnings. It will be interesting to see what happens in the next few months.
There was a paper published by MIT, (much smarter folks than myself) and they said the two new factors that are changing this market is credit liquidity and the creation of a secondary market, that is sub-prime loans. Again, many of the folks that bought homes in the last couple of years would not have been able to by if it were not for exotic financing. Is this bad? Well, when you read another study saying that 2.2 million of these people will default I think we have some issues.
The study goes on to say that in the last two years, 1 out of 5 loans is sub-prime. The sub-prime market now makes up 8% of the entire mortgage debt of the country. 60 percent of these loans will reset in the next one to two years. We will see how weak lending standards have become when these borrowers have to penny up the payment.
Anon:
I read an article saying that few areas are “bubble proof” and San Francisco was on the list. I’m not sure any area is truly immune. Let me post a part of the MIT article here:
“Finally, there has been recent discussion by Glaeser et al. arguing that prices are
rising “excessively” because of a shortage of new construction – due largely to increased
local development regulations. Now it is clear from economics 101 that supply
inelasticity is certainly a necessary, although not a sufficient reason for prices to increase.
But measuring development restrictions, estimating supply elasticities and then
connecting the two to buttress this argument is an empirical task far more daunting than
correctly measuring R/P ratios. Rather than enter this quagmire, we simply want to point
out several important facts about the supply side of the current housing market.”
So even MIT does not have an exact reason why places like New York and San Francisco with very tight building restrictions has seen “excessive” price growth. My view is that there will always be a premium to live in high demand areas such as New York, Paris, London, and even San Francisco. However, these areas are also prone to reverting back rather quickly. These cities gather fuel from the momentum of an economy that has been built on the back of housing. The wealth effect plays an important role in economic growth but also psychological perception. If the perception is that real estate is risky, and these cities are overvalued, there will be a shift to a more conservative approach. But the last few years we have seen the opposite of this; that is NOT buying real estate is risky because you will lose out in 20 percent yearly appreciation. Not only 20 percent but leveraged on a big mortgage.
To answer your question, even MIT does not have a prediction but everyone is sitting on the sidelines waiting to see what happens. I believe that San Francisco will face a correction but to what level location, prestige, and price supports hold real estate values up in the area is a question no one can accurately predict (but it’s fun trying to!).
John:
Until the punch is taken away, we won’t see the damage of what has occurred in the last few years. The cracks are beginning to appear; the dam can only hold so much water before overflowing.
Oh, and greetings from Southern California! Another thing that many fail to realize is that this housing bubble is global including your homebase of Canada. Places such as Vancouver, London, Sydney, and Los Angeles have all taken part in this massive global equity gain. For better or for worse, the U.S. set the vanguard on creating this housing ATM™ mentality. Picture if you will, a technician from Diebold coming to your nice 1970 brick home and slapping a brand new ATM to the side of your home. Now you are given a golden credit card that you can insert into your newly furnished ATM and withdraw any “perceived” equity that has built up in your home. I say perceived because many recent buyers in bubble areas are quickly realizing that this unique ATM works in a different way; you have to pay it back!
So again, the liquidity is so prevalent I should get out my body board and catch a wave on its salty mortgage debt! Anyone else want to join?
I can't tell you what's going to happen this time, but I lived through the 1996 nightmare in LA and can tell you what did happen. I lived in Encino, and my huge townhome went from $295K in 1988 to $180K in 1996. Meanwhile, all around me huge FOR RENT banners went up offering $800 a month for a 2 bdrm with 1 month free rent, etc. Massive vacancies all over. The scar of what happened to me is still felt 11 years later. If you own, get out NOW at any price. You won't regret it.
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