Housing Bubble Bursting?

[moh malekpour]

Mike,
I don’t know your regional inventory and never claimed I know but I said, you need to look at it and compare it to the past. I am checking mine and we are adding 1000 to 1500 listings to our inventory every month. The number of sales is going down 50% every month in comparison to last year. You say your market is getting hotter, although, the interest rates adjustable, hybrid, and fixed rates are going up not just a tiny bit but significantly. This is in contrast with any conventional wisdom. You are talking about your regional attraction to mass migration because people are highly educated and job market is booming. Unless those educated people got educated last year and those job market just opened few months ago, their attraction to mass migration has been already recognized. We have Disneyland, Hollywood, the best ocean, the best universities, and the best climate. Does Silicon Valley ring the bell? It is the center of high technology. Does Irvine Ring the bell? It is a center of most headquarters. Does. San Diego ring the bell? It is one of the most attractive cities in the world. But all of these have been here for at last 30-40 years or more. Some people say the market here will never goes down because of those attractions. My answer is they were here in the 90th and market went down.

 

[Couch Potato]

Mike,
.... the best ocean, .......

I hate to burst your bubble, but your ocean is anything but the best.

 

[JSmith43]

Randolph: If you are still following this thread, my point is that there is less elasticity of demand for basic shelter (real estate) than there is for Nasdaq stock, the demand for which is highly elastic compared to basic shelter. That makes my point that people can't eat stock, it is certainly less of a necessity than having a place to live.

The elasticity of demand argument and the Maslow based argument, in my view, are redundant, since they are basically one and the same. Maslow ranked things according to need. The highest of which have the most inelastic demand.

So, I am confused by your comment accepting one argument but not the other

 

[Big ole Boy]

Elastic and inelastic

The most elastic demand would be self-actualization and the most inelastic demand would be food and shelter.

The top of Maslow pyramid are those things easily done "without" - they are descretionary in terms of need ....

I am thinking right? yes .....? maybe you have things inverted - dyslectia with grids is common ....

.... but, I defer .... to you Roger ..... prices rise much faster in the face of an inelastic demand curve - yes?

 

[JSmith43]

I might have Maslow's pyramid flipped. I didn't remember he had one

All I recall is his concept of ranking needs from things he observed people needed most to things they may have only wanted to things that they were almost ambivalent about,..... heck, I had my psychology classes in the '60's! I'm lucky to remember any of it.

 

[Randolph Kinney]

Roger, in my past education, elasticity was mainly applied to commodities that could be inventoried. One example to illustrate inelasticity of demand was electrical power consumption; dropping the price did not cause people to alter their habits to burn more electricity. Raising the price of electricity had some impact on people to conserve but in the final analysis, you have to live with a minimum level of energy consumption. I believe we are saying the same thing about real estate; it is not that elastic.

A place to live has substitutes but it has first call on income along with food and clothing. Stock ownership is something you do with excess income and you may argue real estate investing also is a substitute for stocks or visa versa. That happens after all the basic needs are cared for. So I believe we are in sync on both accords.

As for supply, stocks have theoretically an infinite supply whereas real estate is limited. Therefore one can opine that over time with increasing population, you have to have increasing real estate prices.

Population shifts can be a problem for real estate prices; up or down. As it was taught, price is a discriminator; it allocates the available supply in a high demand environment. Rising prices usually cause additional supply to be brought to market to absorb the excess demand therefore ameliorating price increases. If rising prices cannot be muted with additional supply, that segment of the population that can no longer afford the basic necessities (food, shelter, clothing) has to move out, a form of disintermediation and reallocation of labor.

In short, nothing lasts forever.

 

[Big ole Boy]

Draconian universes and elasticity

Real estate has more elasticity in a draconian world. People build card board towns or people add 10 people to their homes and collect rent.

Randolf is correct in a "soft world universe" - the hard force universe is too uncomfortable to contemplate.

 

[Brad Ellis]

Guys,

It looks to me like most have cited only a part of the picture but not the whole picture. Might that be because we are trying to bolster our positions?

If I may, I'll point out that if any of us really knew what is going to happen, not many of us would continue appraising. Instead we would be out trading in the futures markets!

Interesting. As many know I predicted a "soft landing". Randolph wants a definition. Fair enough. It is just my personal definition, but I think any overall price drops nationally that do not exceed about 15% would signify a soft landing.

Please remember that I view this over a longer term. Not the 5 years that FDIC uses- I prefer 2 years. But any of you can come up with your own.

My view is echoed by the bulk of the economists out there today.

I believe that as markets normalize we will not see more than that in declines- nationally. OF COURSE, some markets can decline more and others may increase.

Moh points out that interest rates approaching 8% can fuel a drop. I said that many weeks ago- only I attributed this to my source- Freddie Mac at the PMC conference 3 years ago. I will not speak to Moh's source(s).

Randolph demonstrated in another string a decline of 10% already in 3 zips in Carlsbad, CA. He later posted Schiller's predictions used on the CME options market showing a projection of an increase for the San Diego/Carlsbad/San Marcos MSA of 4.8% this year followed by a 5+% drop in 2007 (figures from memory only- no need to jump down my throat). I wonder what his partners Case and Weiss have to say. They have been mum.

Mike predicts the soft landing. Roger and Randolph are into price/demand elasticity. George correctly states that we appraisers have special skills that may be put to excellent use for our own accounts.

Overall, though, I'd certainly suggerst that we quantify our data so that others can better understand the positions.

So, here is mine: I try to look at this over a longer term and on a national vs. local basis. While true that RE markets are local and will be directly impacted by local economies, each local economy is merely a part of the national economy.

Real Estate is not a liquid market and has never been. That means that declines in prices fight the stickiness of movement on its downward trend due both to the illiquid nature of the market and the natural tendency of folks to not "book" a loss on their homes IF they can wait it out.

Now, that also brings the term into play because one does not usually convert the RE holding into cash overnight. So, while Randolph's data on the stock market, while it may be accurate, also apears to be only tangentially relevant. So, while the traditional measure of a "correction" using stock markets is about 10%, real estate markets may take longer. It is for that reason I try to look at the changes over longer periods and believe that we must view both increases and declines in that manner.

As these changes are placed into a longer term view and on a national basis, we begin to see how, for example, the Pac NW market somewhat offsets the Carlsbad market, etc. MA and CT are softening as is FL (still increasing on the Atlantic side but stabilizing or even decreasing on the Gulf side), and parts of the rust belt, specifically IN, MI and OH are softening while the balance of the rust belt is chugging along. Northern CA is again heating up in parts and NV is still increasing while we see Phoenix/Scottsdale softening.

What will happen? Only you will be able to tell that in your local markets. Nationally, I believe that so long as the economy keeps expanding, the fed will continue to raise short term rates; however, once we see a general slowing in the economy- measured by the growth in money supply- probably under M2 (I think that is all demand deposits), I think the fed stops. I see perhaps 2 more increases.

Given that we are already in an inverted yield curve (short term rates over 7.5 but long term rates under 7) I predict that this will continue due to the market foreshadowing the point hwere it believes aggressive fed action has inflation under control. One possible fly in the ointment are oil prices and refinery capacity. Those add to inflation across the board. So, too, does the unemployment rate. But absent any major change there, this may take no more than about a year.

If the RE market's downward stickiness prevails, my prediction on national prices will probably hold true. Time will tell and everyone's precitions might be accurate on a local basis at the same time mine might be accurate for the national scene.

Stay tuned. New OFHEO data is around the corner.

Brad

 

[JSmith43]

OK Brad, put me down for 7.375 C fix 30 peak, one more bump up on federal funds.

MN RE: flat to -5% next 2 years on housing values, (except short term run up in spring in selected areas favoring short commute distances to employment centers). Rest of the country? On average, the same. CA, FL don't count

I already did an oil prediction a year ago on the forum of 70 peak, I have to say for the following 12 months, it will breach 70 due to centrifuge fear and the possible of Israel using the bunker busters we sold them.

Oil will spike briefly to somewhere around 100 during the crisis if Iran is bombed, but will crash to below 50 within 2 years with the 100 spot market price not doing all that much damage since the average paid price during the period will not have gone nearly that high.

Looking forward, Hillary takes the Whitehouse in '08, Dem's get congress. Enraged at some of Bill C's latest capers and attempted interference, she orders Sec of Defense, Madeline Albright to draft an invasion plan in coordination with Japan, for N. Korea. OK. I was just messing around on that last paragraph. Actually Janet Reno comes out of retirement to carry the nuclear football for Hillary. I just hope her shaky fingers can enter the code, if and when Canada once again messes with our fishing rights on Lake of the Woods........

 

[Mike Simpson]

I just observe the market; I'm not looking for either opportunity or despair. I just don't believe that the market can tear along at 10%-20% annual increases a year with flat salaries and home prices 5-6x people's income levels.

I'm not disputing that fact. Except the home price comment...everybody seems to think they know everyone else's income level for some reason. The overwhelming majority of our clients qualify & have no problems paying their mortgages.

What I'm saying is; I look for opportunity.

According to the NAR's Senior Economist..."the Greater Seattle area could see 30-40% home price appreciation in the next couple years."

I happen to think 40% is EXTREMELY optomistic, but double digit appreciation seems to be a foregone conclusion. I believe Mr. Yun because, I saw this unfolding a year-n-half ago & wrote about it here.

Rather than debate any longer...I've got to get outside (the new dumpster's here). Read Georges thread on 'Appraiser's Job Bubble'...I've got to get back to work (make hay while the sun's shinin).

Here's another freebee...San Antonio for positive cash flow.

Bye-bye now,

-Mike