http://www.frontlinethoughts.com/printarticle.asp?id=mwo032808

"Let's look at a few more facts. Due to falling interest rates, a typical adjustable-rate mortgage (ARM) buyer saw his buying power rise 55% from 2000 to 2004. Since then there has been a 21% deterioration. That has helped lower sales traffic for new homes to the lowest level since they began collecting statistics in 1985.

But on a note of optimism, Burns notes the housing market is extremely cyclical. We have had times of extreme distress before, which typically last 3-5 years, and this one too shall pass. Burns projects that sales should be higher than current levels by 2012.

Median resale prices will bottom out in 2010, only about 16% below the top.

Bottom Line? There is no Bottom in Sight

His most likely timeline is that resale stability will come back by 2011, and it will be even earlier for the homebuilders.

He is projecting 6,000,000 home sales (new and existing) in 2008, but falling to only 4,000,000 in 2009. Low sales volume and high foreclosures will delay inventory reduction, which is required for there to be a stable market.

This means that home ownership will fall to 66% of the population in 2009 from the recent high of 69%. He thinks that may overcorrect to 65% in 2010.

When I asked him why the overcorrection, he said it has to do with psychology. Housing will go from the greatest investment in 2006 to a bad one by 2009. The market typically overcorrects at the end of every cycle. It will take rising prices to lure the marginal homebuyer back into the market."

 ...

 And here is the most ominous quote in the entire 76 pages: "In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely."

There's already talk in Congress about forcing banks to lower the outstanding principle on some troubled mortgages. (That should go over well with taxpayers, not to mention neighbors who have managed to keep up their payments only to find out they now owe more than the loser next door).

Employees are advised not to put all their retirement money into company stock. The same advise should apply to their "single largest investment".

The three most important things in real estate are: location, location and location.

Here in the upper midwest the prices of real estate are holding very well.  Does that mean that some homes are not selling or are selling at a discount? YES  Even our liberal newpapers are running articles about the values holding, but at much lower turnover rates.  At the same time developments are still proceeding although at a more cautious level.  We never reached the fevored pitch of develpment of SW Florida or southern CA, and the amount of sepculative flipping was minimal; we now suffer less.

This recession is not going to be an across the board downturn.  Some areas will suffer greatly while other areas are going make it through without issues.  There are many areas of manufacturing with record backlogs (not autos, trucks or homebuilding) that won't feel this recession.  This recession will effect some sectors hard and some geographical areas hard and leave others pretty much unaffected.

The smart investors are looking at the economy and sorting through those areas that will not be effected.  Projects in the oil sands of Canada are planned out for years and the demand for oil is preety much inelastic.  Result is that the price of oil should hold or continue to rise with demand.  Heavy machinery in some cases has 5-7 year backlogs.  The Chineese are not going to cancel orders for cranes or mining equipment.

This recession is very much socioeconomic.  We can solve our problems, we just don't have the desire to do so.  Just like the immigration issue, social security, health care  and a host of other problems; we'll produce a lot of sound bites, but we'll do nothing about it.

Ditto> Judy

also? I take alot of these so called reports skepitsium.. Most are made by Spin Dr.'s 

 REAL ESTATE Agencies that Want the Fed to Lower Rates in Spring, so they can sell more homes.. and I'm sure there are alot of others in these reports with "Hidden Agenda's " as well..

And I think that if we ( the Fed) is going to bail out these people/Banks? Then Why aren't we also going to Benefit by owning a Piece of the Action?

My Neighbors home bought for $83k in 2004, He refinanced it 3 x and ran the debt upto $135k  thru 07' on it and just let the Mortg. co. have it and they resold it for $100k and they want the Fed to make up for there Error in judgement of making those extra loans for Free?

Hey? Sign Me up to do the same for My Business Please!

Adminstrations since Regan didn't want  to make it harder to own a home, but easier to get More people off Welfare Housing roles and a Dozen other  Reasons..that the vast majority Never belonged owing.. Like giving a teenager a Credit Card with no boundries..

Bail out Bear Sterns? A High Risk Junk Bond  Firm?  So their Risk investors can get some of there $ back and there execs can get Millions? So JP Morgan can make Millions? And what do we get?  We get our $ back in maybe 3-5 yrs we loaned them to bail it out but We Loose $ on the deal due to inflation..and We also Loose out on the Hundreds of Millions In Profits, JPM will make...

And let the Tax payers ( Middle and Upper class) Really foot the bill. and  they've known this downside risk for Decades..

Some say will cost the Average taxpayer over $1,000 of their Taxes next yr?

Keep this in mind when you file your income taxes on wether to cheat alittle more or not....

I've made some predictions about housing here before, let me recap them... 50% drop in areas like SoCal/Vegas/Florida, look for prices at pre-1998 levels, also look for median house prices at 3-4 times median household income in most areas.  Without intervention, 10M forclosures, and (obviously) some local banks will fail as a result.

This is if things don't overshoot.  If they do, well... I don't know?  Low, lower than anyone expects.  It's more of a question of sentiment than price, houses need to get to a point of ridicule similar to "dot-com" in 2002.

I've also said that most people won't be able to take advantage of the low prices since those would be cash only, forget about loans.

http://www.frontlinethoughts.com/learnmore

If You Are in a Hole, Stop Digging

I often listen to CNBC when I am driving to work (if I am not on the phone). I am amazed how often I hear (or read) about the bottom of the housing market. Often we hear that the stock market is predicting the bottom. I wonder if any of these cheerleaders actually looks at the relevant statistics. Again, let's do some basic arithmetic so that even an analyst can understand.

Yesterday we found out that new home sales are running at an annual rate of 526,000, the lowest number in almost two decades. The supply of new homes, in terms of the amount of time it would take to work through the inventory available for sale was 8.4 months last October. It is now an even 11 months. (source for data: www.weldononline.com)

How many homes did the home building industry start building last month? Housing starts were running at an annual rate of 947,000. Permits for new homes was 927,000. That means the industry is building over 400,000 more homes than they are selling. Add in a million or so foreclosures. Kill the subprime market. Really make it hard to get a loan securitized for anything but government backed mortgages.

Home construction is going to drop precipitously before the inventory of new homes is worked through. Those who are predicting a rebound this quarter are simply not paying attention to the basic math. New home prices are down 13.3% year over year. They are going much lower. Margins are going to get squeezed. Now maybe the market is pricing all this in. But I think there are better places to gamble than the home builders.

And More Write-offs to Come

And speaking of gambling, a few quick thoughts on the write-offs that we are seeing in the banking industry. We have just seen the beginning of woes. We are nowhere near close to the end, for three reasons. First, the estimated amount of write-offs from the subprime crisis is now approaching $1 trillion (courtesy of the IMF). We have seen (maybe) write-offs of about $250 billion. Where is the other $750 billion?

Now, some of it – maybe even most of it - is in insurance companies, pension funds and sovereign wealth funds. It will be years before we can even estimate how much. There will be no press releases from the Central Bank of China saying they are writing off $15 billion. Which pension fund investment committee will announce their losses? We will only "see" it in lower performance numbers.

But a lot is still in the banking system, having yet to be downgraded by the rating agencies.

Secondly, the problems are spreading from subprime. Bill King called my attention to this note from Housingwire.com. Quote (emphasis mine):

"Moody's Investors Service issued more Alt-A downgrades on Thursday morning, this time taking a heavy hand to 32 different Aaa-rated tranches from 10 different Alt-A deals. Many of the downgrades even pushed former Aaa's into non-investment grade categories - a stunning descent for top-rated Alt-A mortgage bonds that underscores two key points.

"First, defaults are obviously accelerating. Second, many Alt-A deals were issued with less in the way of overcollateralization - which, in plain English, means that these deals will start to see downgrades sooner, compared to the relative stress that a typical subprime RMBS deal can withstand before the hits start coming at the Aaa level.

"The rating agency placed an additional 254 Aaa-rated Alt-A classes on negative ratings watch Wednesday."

Clearly the default disease is moving up into Alt-A loans. Do you think any bank has written these loans off yet? There are more write-offs coming from the mortgage space. It is not unrealistic that we could see as much (in total) as we have already seen.

Third, we are in a recession. That means all sorts of business loans, commercial real estate, credit cards, student loans, car loans and so on are yet to default. Defaults on such loans are a lagging indicator. Those write-offs occur closer to the end of the recession than the beginning and we have not seen much of them yet. We will. Expect banks to continue to post ever larger reserves for losses.

All in all, we are nowhere close to the bottom of the credit crisis. The cycle of large write-downs and then going to the market for more capital is going to continue for some time, perhaps longer than a year. Anyone who is putting money in the financial stocks is gambling, not investing.

....

YET...some RE related ETFs/Funds are up 15-45% since the Jan low? 

Sounds like another low is yet in the works?

A glance at the chart for the Housing Index [$HGX] gives some additional food for thought.  That thing has been in a consolidation pattern and has been setting higher lows since the 1st of this year.  The pattern could be just a pause before continuing a plunge to the depths of hell, but a more probable prediction is that we will see at least a rally in housing stocks soon.

Just thought I would mention it.

uh

Another clue is at the CME housing futures market.  Click HERE.  Charts are available for about a dozen cities.

For example, here's the San Diego chart:

If you wouldn't mind sharing ... 

Is "In business since..." really "Entered this world" or "A business man since...."

Having read your posts on m* and appreciated them, I got curiouser and curiouser 

D

D,

It's the former:  born 1950.  

Cheers,

Norbert 

I don't think we'll see a 50% overall decline in California.  A 30% decline would put prices back at a reasonable level.  In my opinion, California (at least SoCal) remains a prime destination and thus will continue to support higher prices.  Some specific places in CA, like Stockton, might get hit harder, of course. 

If we did see a 50% decline in California, I would be tempted to start buying properties, as you could rent them out for a much better rate than you'd get investing in bonds (at least at current levels), albeit with a lot more hassle involved.  Rents would have to drop a lot more than they conceivably will in order for this not to be true. 

I spent last weekend in Chicago downtown.  The new Trump Building is rising.  The apartments near Navy Pier continue to go up.  Doesn't look like recession.

In the suburbs (Monday and Tuesday) new constrution is booming and develpment continues.  Traffic is still terrible, so I assume that most everyone is still working.

On the othe hand we ran a help wanted ad for shop help and received more respondents than ever (20 yrs).  Construction in Milwaukee is down, but there is work for most companies.  Just some observations.

[quote user="Nagorak"]I don't think we'll see a 50% overall decline in California.  A 30% decline would put prices back at a reasonable level.  In my opinion, California (at least SoCal) remains a prime destination and thus will continue to support higher prices.  Some specific places in CA, like Stockton, might get hit harder, of course.  [/quote]

Yeah, but - being here, I can tell you there is huge housing inventory overhang and it is simply not moving at today's prices.  I've seen a number of properties on the market for 6-9 months.  Some homebuilders have tried cutting prices in half from the peak on some of their developments (one case I know in SD), and it is still not moving very fast.  Also, the net migration has been away from the area.

[quote user="Nagorak"]If we did see a 50% decline in California, I would be tempted to start buying properties, as you could rent them out for a much better rate than you'd get investing in bonds (at least at current levels), albeit with a lot more hassle involved.  Rents would have to drop a lot more than they conceivably will in order for this not to be true.  [/quote]

"you could rent them out for a much better rate than you'd get investing in bonds" - not really.  I've looked at that - the cap rates on most commercial rental properties here are right around 4-5%.  They need to be a lot higher to make them attractive, considering that there has to be a risk premium.  the cap rates on single-family residences are a large negative number, believe it or not.  around negative 4% for the house i'm renting.  in other words, after taking rent and subtracting interest, taxes, maintenance and insurance, my landlord ends up having to pay around 4% of the property value each year.  prices would have to drop in half in order for someone buying that house and renting it to merely break even.  for them to make money at rates better than bonds, the price would have to drop by 70% or so, if my math is correct.  

"they conceivably will" - conceivably being the key word here.  Rents sure aren't going up, again anecdotally they are down about the same as house prices are or a little less  If things get as bad as I think they might, rent may be almost free (bank to renter: "please live in this house for free just to keep squatters away")

I agree that housing prices need to drop further in CA.  Right now they are still way too high and renting has not been especially profitable for the past few years.  It sounds like you have done a lot more research and/or have more general knowledge on the issue, so I will accept what you are saying. 

Anecdotally, however, I have a friend who lives in a 2 bedroom apartment and pays $1250 a month.  Logically, a house in a comparable area should rent for more than that.  Granted on top of that you have to consider the impact of property taxes, insurance, maintenance and so on, but it seems like it would be reasonably profitable if housing prices dropped in half.  The question of whether the rental rate should yield more than bonds would reflect what the market was assuming in terms of appreciation/depreciation in price. 

I suppose you could see a reasonable rate of return if housing either dropped in half and rents declined, or if housing dropped less than that and rents stayed pretty much constant.  It seems like depending on what assumptions you make, you can come up with different end results. 

Maybe a better way to measure the reasonable value of housing is just to take median income and multiply it by whatever the historical average home price multiple has been.  Granted we can overshoot, but that is around where prices should settle eventually. 

In short, I agree that a 50% drop isn't out of the question, but to me a 30% decline seems more likely.  Keep in mind that a lot of effort will go into trying to stem the decline in prices from politicians and so on, which means the decline may be less than what it reasonably should be.