Opinion: When will the Real Estate market reach bottom

[perinova]

In other words when will it be best time to buy?
Some links with expert opinions might be good.

 

[wabmester]

Impossible to predict the date, but here are some thoughts.

* The last bubble took about 6 years to unwind.   This one is *much* larger.

* Take a look at historical housing prices/growth in your area to get an idea of what the trend was, and then watch for the time in the future when prices have reverted to the mean.   Prices often overcorrect after a bubble, so mean reversion won't necessarily mark the bottom.

* In general housing prices have historically risen at close to the rate of inflation.   So, even a period of flat growth over a number of years could bring prices back in line with the historical trend.

* Housing tends to take off starting at the bottom of economic cycles.   So, if we enter a recession, then expect housing to recover once the economy recovers.

* There's a new housing price futures market.   The current prediction is a nation-wide median price drop of 5% for next year.   Futures markets often represent the best preditions since people are betting real money on the outcomes.

 

[mathjak107]

people in the field are saying a decade

 

[uncledrz]

When eveyone says they can't go up.

 

[honobob]

When eveyone says they can't go up. 

Maybe the day after that's said, around noon I think, if you want a more accurate estimate.

 

[Arif]

I'm still of the mind that the market overall doesn't matter to me and much as what is happening to my local market. There are still buyers for homes in my market. Prices never went up over 5% per year during the last few years so I don't expect prices to collapse here. Now San Diego, SF, Boston and FL might be a different story. BTW there has been at least one survey that shows several towns in the US with home prices that were undervalued. IIRC there were several places in TX that were undervalued.

 

[macdaddy]

Rents (inflation) will also affect price declines. If rents continue to rise for a few years, price declines won't be as severe. If a recession hits and the Fed lowers rates then I think that will support prices on the way down. For really steep declines I think we need to see mortgage rates go a few points higher, at which point even most dual income professionals will be locked out of the market.

 

[sgeeeee]

All of the above . . . depending on where you ask the question.

 

[kramer]

Wab -- GREAT POST.

Do you have any links (or more insight/intuition) for the following:

* The last bubble took about 6 years to unwind. This one is *much* larger.

* There's a new housing price futures market. The current prediction is a nation-wide median price drop of 5% for next year. Futures markets often represent the best preditions since people are betting real money on the outcomes.

Thanks,
Kramer

 

[2B]

I'm still of the mind that the market overall doesn't matter to me and much as what is happening to my local market. There are still buyers for homes in my market. Prices never went up over 5% per year during the last  few years so I don't expect prices to collapse here. Now San Diego, SF, Boston and FL might be a different story. BTW there has been at least one survey that shows several towns in the US with home prices that were undervalued. IIRC there were several places in TX that were undervalued.

All real estate is local. In the early 80's the whole Gulf Coast plunged during the oil bust. Home prices in the NE and California boomed. The company I worked for at the time had to cover peoples home losses to get them to take transfers. It was in the mid-90's before most home prices had fully recovered.

Texas hasn't participated very much in the boom of the last 5 years but now the oil and energy business is taking off again.

 

[Helena]

Homebuilders are in trouble.



Earnings Preview: Pulte Homes

"Our June survey of real estate agents indicated that housing trends worsened from already-weak levels," Bank of America analyst Daniel Oppenheim wrote in a June 28 client note. "We now expect a 48 percent decline in earnings in 2007 and a 72 percent decline in 2008 based on the weak trends and our expectations for the future."

http://news.moneycentral.msn.com/ticker/article.asp?Symbol=US:PHM&Feed=AP&Date=20060724&ID=5890301

 

[wabmester]

Kramer, there are several economic blogs with good coverage of the housing bubble.   One of the better ones:

Calculated Risk

The Office of Federal Housing Enterprise Oversight collects lots of good price data.   You can see it in graphical form here going back to 1975:

inflation-adjusted housing prices

Take a look at LA, for example, and you'll clearly see their previous bubble peak in 1989 and recover around 1996.   Similar story but different timeframe for Boston and others.

The Federal Reserve flow-of-funds data shows the growth of housing relative to GDP.   The separation from the historical trend has been pretty amazing starting in about 2000:

Housing vs GDP

Note that those graphs overstate things a bit since they use a linear scale, but you get the idea....

The CME housing futures market only goes out one year, but it does predict a drop in prices for the US composite of 10 markets.    Google "CME housing futures" for various articles.

 

[AFloat]

lots of anecdotal evidence of a bubble and links to other sites here -

http://www.thehousingbubbleblog.com/

 

[al_bundy]

I'm still of the mind that the market overall doesn't matter to me and much as what is happening to my local market. There are still buyers for homes in my market. Prices never went up over 5% per year during the last  few years so I don't expect prices to collapse here. Now San Diego, SF, Boston and FL might be a different story. BTW there has been at least one survey that shows several towns in the US with home prices that were undervalued. IIRC there were several places in TX that were undervalued.

from what i read texas and colorado are pretty overbuilt and for some reason have a huge number of foreclosures and ARM/IO loans. if there is a surge of foreclosures there in the next few years as the loans reset to higher rates you will probably see prices drop as builders keep on building

 

[Arif]

from what i read texas and colorado are pretty overbuilt and for some reason have a huge number of foreclosures and ARM/IO loans. if there is a surge of foreclosures there in the next few years as the loans reset to higher rates you will probably see prices drop as builders keep on building

I don't know anything about CO but in TX I think what you are seeing there is people getting mortgages that weren't suppose to. For instance, folks that don't make enough money buying a house with little or no down and the low int. rate with the ARM. That scenario would happen whether there was a bubble or not. It is more a function of these exotic/risky mortgages.

Maybe some parts of central TX like Austin is over built but places like Houston and outskirts of Dallas are pretty darn cheap on a price per sq ft basis compare to the other markets I mentioned earlier.

 

[REWahoo]

Maybe some parts of central TX like Austin is over built...

"Nationally, existing home sales are down four percent, but in Austin sales are up 11 percent."

"Single-family home sales in the Austin, Texas, area posted a seventh consecutive month of double-digit growth in July and set a record for the month..."

 

[kramer]

Thanks, Wab. Wow, the total housing stock value vs. GDP I find to be quite a convincing statistic.

Kramer

 

[brewer12345]

I don't know anything about CO but in TX I think what you are seeing there is people getting mortgages that weren't suppose to. For instance, folks that don't make enough money buying a house with little or no down and the low int. rate with the ARM. That scenario would happen whether there was a bubble or not. It is more a function of these exotic/risky mortgages.

I think the bubble was largely riven by loose financing, so that is how the bubble will come crashing down. Subprime lenders are starting to feel pain from the securitization markets and they are pulling back from some of their riskier loans to crappier borrowers. Next, the very popular option ARM products that allow lots of negative amortization will either be yanked off the market or will be altered to require much higher minimum monthly payments. Finally, we might see tightening up of underwriting standards, especially on no-doc programs. With each tightening of the credit flow, more buyers get knocked out of the market. Not good for prices.

But all of these things take time. I agree with Wab: we will not see the end of the correction in the bubble markets for at least 3 or 4 years, possibly longer in some locales.

 

[tryan]

you'll clearly see their previous bubble peak in 1989 and recover around 1996. Similar story but different timeframe for Boston and others.

Yup, the "bottom" in the Boston area was 1992-1993. What fun that was! Banks foreclosing and NOT taking title because they didn't want to manage the property (too much liability). Used to shop though a 1/4 inch stack of REO listings ... oh, those were the days! Bought many propertied for a dime on the dollar (compared to the forclosed note). Can't wait to do it again!

Always said the next bottom will be achieved in about 1/2 the time the top was achieved. 6 years out seems about right (assuming we've topped). A nice deep recession will speed things up a little.

 

[MooreBonds]

Wab - excellent link on GDP vs housing stock.

One question: does anyone have any info/data on the % growth of second vacation homes? As boomers retire (and people spend more of their disposable income on things like vacation homes), the number of homes will go up relative to the population/GDP, and might account for a small part (but obviously the housing bubble accounts for most of the froth vs GDP in recent years).

Also, another (small) factor: as more illegal aliens enter the country and the value of their services is off-record, that would (slightly) reduce GNP output, while the housing stock would still increase due to their housing needs...

Again, both of these are slight changes compared to the 40s/50s/60s/70s, but these and other factors may account for a little bit of the disparity and (possible) paradigm shift/adjustment.

 

[audreyh1]

One question: does anyone have any info/data on the % growth of second vacation homes? As boomers retire (and people spend more of their disposable income on things like vacation homes), the number of homes will go up relative to the population/GDP, and might account for a small part (but obviously the housing bubble accounts for most of the froth vs GDP in recent years).

I would think it more likely that when someone retires, they move to their vacation home and sell their primary residence for the boost it will give their retirement portfolio.  I tend to hear of people getting rid of extra real estate when they retire rather than hanging on to multiple homes.

Just my impression based on anecdotes.

Audrey

 

[wabmester]

I would think it more likely that when someone retires, they move to their vacation home and sell their primary residence for the boost it will give their retirement portfolio.  I tend to here of people getting rid of extra real estate when they retire rather than hanging on to multiple homes.

That's what we did.   We had owned two homes for the last 10 years.   Maintaining a second house was a pain, but strong appreciation relieved the pain a bit.   We finally sold off the main house this spring and downsized to our smallish beach house.   There was a little bit of market timing in our decision process, but we don't miss the big old place a bit.   Maintenance and recurring costs are reduced, and the bank account has been fattened.

Growth in second home sales has been high over the last few years, but it will probably be the first segment to fall since those homes are discretionary purchases.

recent NY Times article

 

[MileKing]

Which real estate market are you referring to? People seem to think that on a national level there is some type of huge housing bubble. But real estate is largely local. So while there may be some markets that are declining, others are still going strong (as at least a few posters have pointed out).

Aside from that point, adopting a contrarian approach usually serves one well and now is no exception....."when everyone thinks alike, everyone is bound to be wrong". Sensational news headlines about increasing inventory and declining prices has led the overwhelming majority of people to believe that no one wants to own a house any more and that soon we will see houses being given away as prizes inside boxes of Frosted Flakes. Over at fatwallet.com, some are expecting 40% declines in prices and 70% of ARM loans in foreclosure. The theory has been that all the 'flippers' will be dumping their houses on the market, but reality is that anyone who is investing in a given real estate market probably follows it quite closely and will have already listed their property. Thus, in the overheated markets, inventory has likely topped out already. Short of a major recession, the contrarian view says with such negative sentiment, now would be an appropriate time to buy into some of the declining markets.

 

[Helena]

Here's an interesting article:


"The Biggest Slump in US Housing in the Last 40 Years"…or 53 Years?

http://www.rgemonitor.com/blog/roubini/142759

 

[al_bundy]

the 2005 flippers are selling now and in the bubble markets they haven't sold everything. next year they will have competition from the first big wave of ARM loans adjusting.

you will also have the people selling that are selling due to normal life things. if a family bought a house in 2003 for $300,000 and needs to sell to move they will have no problem sellng it for $325,000 even if the neighbor flippers bought a similar house in 2004 or 2005 for $400,000 or $500,000.

This year we are just getting back to normal market conditions and the usuall panic from people who don't know anything except the RE market of the last few years. A lot of these people can't fathom the fact that it takes an average of 4-8 months to sell a home.

if there is a bubble popping, we will see it next year. it's been known for a long time that there are a lot of people who bought homes based on teaser rates with a plan to downsize.