Sizing the Housing Bubble

[wabmester]

Any of you in LA - Orange County area know the % price decline necessary to revert to the mean?  Mortgage defaults have already hit a record high (since data collection began in 1992), and there's over 6 months worth of inventory piling up.  Its only the beginning.  How low will prices go?

I've been watching OC for a while. Inventory is up 140% YoY, sales down 26%, and prices are just starting to plateau (slight drop over the last month). So, yeah, it's still early.

Prices could drop nearly 50% if they revert to the mean, but that could take a *long* time, and inflation would take care of some of the erosion. I was there for the last bubble, and if things play out the same way this time, Riverside, condos, and high-end homes will lead the way down.

Riverside has already had a huge increase in foreclosurers. Up 104% YoY.

Here's an OC Register reporter with a pretty balanced blog.

 

[veritasophia]

Thanks Wab, nice blog.

Prices could drop nearly 50% if they revert to the mean, but that could take a *long* time, and inflation would take care of some of the erosion.

I hope a *long* time won't mean following in Japan's footsteps. The housing burst of 1990 took approximately 5 years before showing a recovery. According to the data, this bubble seems much worse. So you are probably right, it will take a long time.

 

[Nords]

I hope a *long* time won't mean following in Japan's footsteps.  The housing burst of 1990 took approximately 5 years before showing a recovery.  According to the data, this bubble seems much worse.  So you are probably right, it will take a long time.

Don't forget, last time we were fighting a war in Iraq and inflation was taking off and the new Fed chairman didn't have a lot of experience in the job so they overtightened and... uhm...

... never mind.

 

[kcowan]

Don't forget, last time we were fighting a war in Iraq and inflation was taking off and the new Fed chairman didn't have a lot of experience in the job so they overtightened and...  uhm...
... never mind.

Love it! Is there an echo in here?

 

[Scrooge]

Don't forget, last time we were fighting a war in Iraq and inflation was taking off and the new Fed chairman didn't have a lot of experience in the job so they overtightened and...  uhm...

Nice try, but the 1990-1991 recession started before Iraq invaded Kuwait

 

[Siv]

I think the bubble starts when everyone in town starts talking about it.

Hm, I feel reallllly...sorry to those that have 2 mortgages hoping to sell one for appreciation, now can't and maybe on the way to lose equity, sorry to those that are in mcmansion with only 3 people inside.

People forget life is dynamic.

I grew up in big house it's now 28 years. I had seen my mom being a slave to it when there's no help, the house is in constant repair from pipes, bathroom, new paint, sewer, curtain...oh my.

Life is good when it's carefree, baby!!

 

[wabmester]

There's a WSJ report out today that economists are finally starting to estimate the impact of a RE bubble pop:

As Data Point to Slowdown, Housing Market May Land Harder Than Economists Predict

When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50% decline in sales, says Ian Shepherdson, chief U.S. economist at consulting firm High Frequency Economics. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. "It's a 15-year bubble unwinding in two years," Mr. Shepherdson says. "It's going to hurt."

 

[honobob]

When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50% decline in sales, says Ian Shepherdson, chief U.S. economist at consulting firm High Frequency Economics. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. "It's a 15-year bubble unwinding in two years," Mr. Shepherdson says. "It's going to hurt."

So unless you're a developer with alot of standing inventory or invested in a company that supplies them this should mostly be a spectator event for most of us.  Any home builders on board?  I wonder why they didn't speculate on any change in new-home sales prices.  Just a guess but it seems that most new-home builders now as opposed to 15 years ago are large multi-state companies such as Kaufman & Broad.  I wonder how the slow down in new-home sales will affect them as opposed to the small developer.

 

[brewer12345]

So unless you're a developer with alot of standing inventory or invested in a company that supplies them this should mostly be a spectator event for most of us. 

You think so? Most developers have a fair amount of financial leverage on the balance sheets. All that debt has to be serviced, and construction/conversion loans are pretty short maturity in most cases. If you have developers desparate to move new houses and slashing prices by 25 to 50%, what do you think the effect will be on resales? Gotta have an effect on pricing. Then again, most of us are not highly leveraged real estate speculators, so it really may be a spectator event.

 

[wabmester]

I wonder why they didn't speculate on any change in new-home sales prices.  Just a guess but it seems that most new-home builders now as opposed to 15 years ago are large multi-state companies such as Kaufman & Broad.  I wonder how the slow down in new-home sales will affect them as opposed to the small developer.

As the article mentioned, the futures market currently estimates a 5% drop in prices for next year.

They also go on to estimate that the impact in builders + the impact in consumer spending will knock 2% off GDP growth next year, and that assumes an orderly slow-down.

The stock market doesn't like economic slowdowns.   Employers don't like economic slowdowns.   This will impact everybody.

 

[brewer12345]

As the article mentioned, the futures market currently estimates a 5% drop in prices for next year.

They also go on to estimate that the impact in builders + the impact in consumer spending will knock 2% off GDP growth next year, and that assumes an orderly slow-down.

The stock market doesn't like economic slowdowns.   Employers don't like economic slowdowns.   This will impact everybody.

Yep. I am thinking that on the next idiot pop in the equity market (most likely a Fed relief rally, or something similar), I will be buying some long-dated index puts.

 

[BUM]

Well lets see, we've sliced and diced this bubble on different threads via ownership (rent/buy), financing, reits, etc. How about looking at a 5 year chart of TOL and America's largest homebuilder DHI. They are both paring down options on undeveloped land. Might be worth a look sooner or later.A couple funds I'm watching just added DHI. Too early for me. Who knows?


http://finance.yahoo.com/q/bc?s=DHI&t=5y&l=on&z=m&q=l&c=tol

 

[justin]

Well lets see, we've sliced and diced this bubble on different threads via ownership (rent/buy), financing, reits, etc. How about looking at a 5 year chart of TOL and America's largest homebuilder DHI. They are both paring down options on undeveloped land. Might be worth a look sooner or later.A couple funds I'm watching just added DHI. Too early for me. Who knows?

If I was a sector player or stock picker, I'd be watching these. Trailing PE's of 4-5. It will be interesting to see how the earnings end up in the following years and the resulting PE. Could be a value play at some point soon.

 

[brewer12345]

Well lets see, we've sliced and diced this bubble on different threads via ownership (rent/buy), financing, reits, etc. How about looking at a 5 year chart of TOL and America's largest homebuilder DHI. They are both paring down options on undeveloped land. Might be worth a look sooner or later.A couple funds I'm watching just added DHI. Too early for me. Who knows?


http://finance.yahoo.com/q/bc?s=DHI&t=5y&l=on&z=m&q=l&c=tol

Wouldn't touch them with a stick right now. Until we know more-or-less where the bottom might be on the housing market, it isn't worth the risk.

 

[foxhuntr]

My FA put me into HPB , capital protected bear notes, which are a play on the bubble bursting. Sounds like he steered me in the right direction!??

 

[ShokWaveRider]

Me and DW are visiting Washington DC right now, she bacame a citizen recently. Of course I had to look at the housing market. While a rabbit hutch here cost $600k I have noticed plenty of reduced signs and people offering $10 - $15k off closing closts.

PS. Went to the national archives today Saw the Constitution, Bill of rights and of all things the Magna Carta. Pretty Kool I must say, DW got a little misty.

DWR

 

[dumpster56]

Me and DW are visiting Washington DC right now, she bacame a citizen recently. Of course I had to look at the housing market. While a rabbit hutch here cost $600k I have noticed plenty of reduced signs and people offering $10 - $15k off closing closts.

PS. Went to the national archives today Saw the Constitution, Bill of rights and of all things the Magna Carta. Pretty Kool I must say, DW got a little misty.

DWR

Gotta love people who become american citizens. We Love them!!

I must say however I have lived and visited DC a bazillion times and have seen the constitution 1 time.

Heck lived in NYC and NJ for 40+ years and never went to the statue of liberty or the empire state building.

I must be jaded.

 

[al_bundy]

When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50% decline in sales, says Ian Shepherdson, chief U.S. economist at consulting firm High Frequency Economics. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. "It's a 15-year bubble unwinding in two years," Mr. Shepherdson says. "It's going to hurt."

So unless you're a developer with alot of standing inventory or invested in a company that supplies them this should mostly be a spectator event for most of us. Any home builders on board? I wonder why they didn't speculate on any change in new-home sales prices. Just a guess but it seems that most new-home builders now as opposed to 15 years ago are large multi-state companies such as Kaufman & Broad. I wonder how the slow down in new-home sales will affect them as opposed to the small developer.

average profit margins for Toll Brothers is around $90,000 per house. If the ARM and I/O loan people try to sell next year and Toll cuts their margins to $0 just to keep operating that is a lot of people who won't be able to sell when they HAVE TO SELL. and a lot of inventory to work through before demand picks up again.

 

[73ss454]

After trying to sell our NY house for the last 4 months we finally accepted an offer at 570K. We kept reducing from 679K to 589K and then ended up at the 570K. Saturday we will sign the contract and start packing to move by Oct. 1st.

DW and I will leave our jobs and move off to Florida and try the retirement thing.

I'd like to thank all the people on the forum for all the great posts and advise that have made this possible. 2 years ago when I started reading the forum I didn't have a clue.

 

[REWahoo]

73, congratulations on selling your house. I know that was a frustrating undertaking and one you are very glad to get behind you so you can get on with "the retirement thing".

Best of luck with that and please keep us updated on the progress of your new adventure.

 

[astromeria]

Woohoo! I hope you made a profit despite getting a lower price than you hoped for. I would advise not rushing into buying another house right away--ShockWaveRider has done well by renting in Floriday for the past year (IIRC). Whereabouts do you plan to locate in FL?

 

[73ss454]

We bought the house in Fla. 4 years ago, it's in the Melbourne area about 18 miles from DD. Our second grand child will be born in Fla. in Oct. so it should be a good thing.

The prices in Fla. have shot up in recent years like most other places but they are taking a hit right now. Looking forward to getting away from the NY winters.

 

[BUM]

Looking forward to getting away from the NY winters.

Congrats again!
Me too...havent figured out how to do it yet. NC is not far enough south.

 

[nfs]

You may have thought ugly was coming but ugly is here already.

An anecdote from the WSJ.

Joan Guth is one homeowner who was taken by surprise. Last September, she put her stately five-bedroom home in Herndon, Va., on the market for about $1.1 million. She was confident she would get something near that price, and planned to use the proceeds to buy a retirement home in Florida. But her home in the Washington suburbs attracted few serious lookers, and in March, she cut her asking price to $899,900. Still there were no takers. Finally, on the advice of her broker, she called in an auction firm, beginning a process that would eventually reveal to her just how weak the Northern Virginia market had become. ...

She and her family decided they would accept the highest bid of at least $675,000.

Kristin Eddy, a 35-year-old pediatric occupational therapist living in a town home in Reston, Va., had noticed Ms. Guth's dark-green turreted home with its wraparound verandas while riding her bike along a nearby trail. "I've had my eye on that house for a long time -- as a dream," Ms. Eddy says. When it first went on the market, it was far beyond her price range. Then she noticed the sign announcing the auction.

On the morning of Aug. 5, the auctioneer, Stephen Karbelk, set up loudspeakers on Ms. Guth's side lawn. Ms. Guth handed bottles of chilled water to the several dozen bidders and curious neighbors who showed up. "I have a whole stomach full of butterflies," Ms. Guth said.

Ms. Eddy figured her chances of winning were near zero. When the auction began, it became clear that there were only two serious bidders. Although Mr. Karbelk tried to stir excitement, the bidding petered out within minutes. Ms. Eddy was the high bidder, at $475,000.

Looking stricken, Ms. Guth and one of her sons huddled with their broker for a few minutes. Then they told the auctioneer they wouldn't accept the bid, which fell below the stipulated minimum that hadn't been revealed to bidders. The auction was over.

Ms. Guth said she would move and leave the house empty until she could sell it at a reasonable price. Late that afternoon, Ms. Eddy raised her offer to $525,000. The Guths wavered for two days before agreeing to accept about $530,000. Ms. Eddy is getting a home with five bedrooms, four full bathrooms, a half-acre lot and a three-car garage for about what some people had been paying until recently for town houses in the area.

 

[Nords]

You may have thought ugly was coming but ugly is here already.

That's not ugly-- that's deep-value investing!

We're waiting for the blue light to start flashing in our neighborhood... we can be patient... sometime in the next decade...