Housing Bubble Bursting?

[JSmith43]

John, I followed things like Stockman's flip back then. The chicken sh** was an architect of the tax reductions and proponent of supply side economics that critics attempted to deride by labeling it Reganomics or the trickle down theory.

It was better to run higher deficits with decreased tax rates since it put more political pressure on democrats and spend thrift republicans to cut back their outrageous demands for more programs on their resume. That was an era wherein reduced taxes helped double revenues, while the spending tripled in the same time period. At least there was a bigger pie and accelerated spending finally cracked under political pressure via the deficit. Hmmm, just like interest rates and Carter era stagflation was quenched by a brutally steady hand with rates.

It was a game of chicken and he blinked publicly. Hurray for him. I'm glad his words have been deleted from history according to Google:icon_smile:

 

[Randolph Kinney]

Randolph,

Actually, the inverted yield curve lasted this time for a much longer period than typical- well over a month- highly unusual.

Of course, it is, as you said, not all that important, except as we measure expectiations.

You have a much shorter time horizon than the FED. One month of less than 25 basis points of inversion is very minor and that time duration hardly gives the economy any time to adjust.

If you want a real signal, you need 50 basis points inversion difference and 6 months duration.

So, no surprise to me if they continue to raise rates until they believe inflation is under control. I am guessing at least one more and perhaps 2-3.

The FED is really behind the curve for inflation expectations. It had signaled pause prematurely. The markets have over reacted to that with massive speculation in commodities. It is going to take more than 50 basis points of increased FED funds rate to impress the markets, specifically the bond market.

And Randolph, we are now getting to the point where the confluence of events will drive the markets down further. Two quarters of decline in prices. Last NAR report showed a decrease in existing home prices from about $225K down to $218K nationally. Couple that with continued inflation.

I expect that to continue thru most of this year confirming the correction now under way.

How times have changed since March and what your expectations are now. :new_smile-l:

But here is my question: What do you think will happen to prices once the upward interest rate spiral ends? Just stabilization or price increases?

Brad

What prices are you talking about? Interest rates reflect credit and money supply conditions. Stopping the increases in interest rates does nothing to put liquidity back into system that was lost. The problem now appears to be going forward is how to restore consumer confidence once it becomes lost.

 

[Blue1]

When have prices ever just stabilized for any period of time?

On almost every appraisal I have reviewed?

 

[Brad Ellis]

Randolph,

I'll forget about the number of basis points since you are the only one I have ever heard of who claims you need 50 basis points for the market to react to it. Cite your source and I'll consider it. Not saying it is wrong- onoy that I have never heard this before.

As to the correction, I have said from day one that I believed it will take a couple of quarters to know. During that time rates continued upward but no one- including you or I- knew how strong the economy would be. Please also remember that I said it was going to take rates approaching 8% long term for mortgage pain to set in- and that was based upon a Freddie statement at the PMC in 02 with which I agreed. We may be getting close to that but we are not yet there.

Further, we have documented decreases of about $7K from a top of $225K average for existing home sales. 3%. Assuming we get another such drop by end of Q2, it still is not approaching anything that one could claim nationally as "bubblicious"- apologies to the bubble gum maker.

Just, so far anyway, a return to normal marketing times in most markets with
buyers getting the upper hand over sellers. I still do not see anything very unusual. Larger drops in the hottest markets would be no surprise either but may not have all that large an impact upon national results.

What I asked you for were your predictions of existing home sale price averages once interest rates have stabilized. Sorry if that question was not clear.

George,

First I'll give you my definition of stabilized prices. I consider them to be stable when price increases are tracking inflation or are not increasing at all. It may not have happened in SD county but it did happen for long periods of time in the midwest back in the 90's. If you want to look at it differently, let me know what your definition or guage would be.

Brad

 

[Austin]

A Little Pontification On The Issue At Hand

A few observations on the above discussion: You guys seem to have the mindset that 3% inflation in real estate values is the norm and the norm is good. If 3% is good, why isn’t 4% better? If 4% is better, why isn’t 5% even better? Isn’t an inflation rate at any level a sign of an imbalance? Whatever happened to equilibrium? What defines a normal market in equilibrium? What would happen if property values and inflation were in equilibrium and values decreased in relation due to normal accrued depreciation?
My view of institutionalized inflated at 3% is that it is a gimmick that enables the creation of a false economy that has to be constantly fined tuned to keep in balance. This gimmick is like every gimmick, it works for a while but sooner or later the chickens come home to roost. The dotcom boom of the 90’s never happened. It was all a shell game on paper as is the recent real estate run up. It is like going on a borrowing binge, it feels good until the payments come due then you have to payback what you borrowed with interest.
My brother-in-law’s best buddy retired in the late 90’s from a big telephone company with all of his retirement in company stock. The stock went from like $90/share to $3 per share. He now drives a school bus for $14,000 per year. If the stock had been valued realistically this never would have happened. It was actually never worth more than $3/share. It was all based on false expectations. What is the real price of stock? It should be based on earnings and realistic expectations of future earnings. The problem came about when the price of the stock went up and people bought it because the price was going up. Then more people bought it because the price was going up even faster. It turned into a game of musical hot potato. The person holding the potato when the music stops loses. That was the company retirement fund. They couldn’t sell it because it was in their retirement fund.
Same goes for the real estate market. Everyone makes money in a bubble except the people that end up holding the bag. In the instance of the residential market it is the entry-level people that can afford it least. Robin Hood in reverse. Steal from the poor and give it to the greedy. All encouraged by the regulators of the political economy who use the above-described model as a tool to fine-tune the business cycle. Heads we win, tails you lose.
I have been doing a lot of demographic analyses recently and one thing I keep seeing that is very unusual. Huge and unusual growth in the $100,000 and up income groups. Where are these people with all of this income coming from? How many school bus drivers can the market absorb? How many economic body bags full of the losers in this model can the American conscience withstand? Our economic model is nothing more than a Rube Goldberg contraption to keep the system going just one more day. Tomorrow is another day. We will worry about that tomorrow.

 

[Steve Owen]

First I'll give you my definition of stabilized prices. I consider them to be stable when price increases are tracking inflation or are not increasing at all.

I had a long disucssion about that with an appraisal instructor, concerning the neighborhood section of the old URAR. I said that I considered prices to be stable if they were increasing at the same rate as inflation. She said "no, they want you to reflect an increase if the nominal prices are increasing." Well, I went back and looked at the form and it says "Property values" with the choices "Increasing, Stable or Declining." It is my contention that if the wanted nominal prices, the form should have said "Property prices."

Point is, there is a difference. Property values should include the effect of inflation (or deflation) in my opinion. And, since inflation has been at 2 to 4 percent over the last several years, and since residential appreciation has also been at 2 to 4 percent in this area, then I would contend that values have been stable... and that is what I check on the form. However, prices have been increasing at an average rate of 7 to 9 percent. When you look at the last twelve months, sales of 2,442 SFR properties from 5/1/05 to 5/1/06 had an average price of $105,522; from 5/1/04 to 5/1/05 the average sale price was $97,255 on 3,557 sales. Therefore, the percentage difference in average sale price for the area when last year is compared to this year was 8.5 percent while the percentage difference in volume was a negative 31.35 percent. It is important not to draw hasty conclusions from one period of data; last year was an unusually high year for volume. The prior twelve month period had 2,078 sales with an average price of $95,544; so that increase in average sale price showed only a 1.79 precentage difference compared to the next year.

My point is that it's important to know how you are defining terms. When you only consider difference in average sale price, you are including remodeling and new construction... you are just looking at the price of the average sale, not necessarily at appreciation of an individual SFR. It is my point that the appreciation rate is a much more important statistic to the average homeowner. While the average price difference might be quite important to the taxing authorities, it says little to me about how much more I can sell my house for. And yes, over the last few years, values here have been what I would call "stabilized."

 

[Big ole Boy]

overnight trends

Property values never stabilized around here ...... they went from increasing to decreasing overnight .........

property values here are not keeping up with inflation .... anymore ..... and for the longest time they were keeping ahead of inflation .....

prices are flat and declining ........ and outer core "outsider" inflation is expanding geometrically .....

 

[Bobby Bucks]

It would be a terrible thing for the bubble to burst while Austin is in Margaritaville.

 

[JSmith43]

Memo to self: Self, put in scope addendum a statement that comments regarding price stability are approximate values, expressed in relative terms. Changes and trends in nominal prices are compared in terms of constant dollars (adjusted for inflation) in order to enhance consistency and accuracy of the comparisons made.

They will be too busy diagraming your sentence to think of anything other than "appraiser to comment about his lack of English composition skills..."

Austin: You may have a point, but things really aren't so bad for us bus drivers. I think you should increase your international travel and exposure to other cultures, like Montana:new_usa:

 

[moh malekpour]

Austin,
You are so right. I just don't know why some poeple don't get it. Don't be suprised if someone told you that this is Capitalism in a free society. I never thought capitalism would agree with this kind of economy and wealth creation. A real wealth and income is the person's talent, experience, service that has demand in the society not the stock share or real estate wealth that is created on manipulation, bubble and false economy. This kind of shaky wealth will be vanished as fast as they were created.