Monday, October 08, 2007

Large Price Declines Expected in Fall and Winter

It is now the end of the beginning of the housing bust, in most bubble markets across the United States. In most bubble markets prices have fallen between 6 - 20% in real dollars from peak prices. In many bubble markets peak real dollar prices were reached in late 2005 or early 2006. With the coming of fall and winter, large inventory, slow sales, tightened lending standards coupled with increased negative buyer and seller sentiments will lead to large price declines over the next 6 months.

Real dollar prices will likely decline between 6% and 13% over the course of the next 6 months in most bubble markets.

Large Inventory

Inventory is significantly higher in most bubble markets then last time this year. According to Housing Tracker as of 10/01/2007:
  • Miami: 24.3%
  • San Diego: 3.6%
  • Washington, DC: 9.1%
  • San Francisco: 21.3%
  • Baltimore: 21%
  • Orange County: 10.9%
  • Portland: 32.2%
According to the National Association of Realtors, "inventories of unsold existing homes on the market rose by 0.4% to 4.58 million, representing a 10-month supply at the August sales rate, the Realtors said. For single-family homes alone, the inventory represents a 9.8-month supply, the most since May 1989. (Market Watch Sep 25, 2007)"


Sales Declining

According to the National Association of Realtors the September 2007 Existing Home Sales Pending Index broke the previous low of 89.8 in September 2001. September 2001, was that month of a major terrorist attack (9/11). Home sales have fallen tremendously from the peak of the housing bubble.

According to insides information via Housing Doom, who is busy reporting the shocking numbers that sales are declining precipitously in Phoenix.

As of this morning we had 3,176 sales for September. Obviously, there will be no official closings on the weekend but there may be a few more that trickle in because a few agents entered the 29-30th as COE. This will leave Phoenix with a 18 month supply of homes (57,441 active). In addition, September has seen one of the largest monthly drops in value on a cost/sf basis.

It believe the rush to close deals in August sucked a lot of sales from September.


In the Seattle area, "sales are lagging. Offers were accepted last month on 1,541 King County houses — a 32 percent drop from the numbers in September 2006 (Seattle Times, Oct 6, 2007)"


Lending Standard Tightened Up

Lending standards have tightened up significantly in the last 3 months. Richard Syron, chief executive of Freddie Mac said "the credit squeeze had left some parts of the housing market "literally frozen", which was a "substantial depressive to the overall economy" (MSNBC Sept 28, 2007).



ARMs are Adjusting / Foreclosures Are Rising

Nearly a quarter of a million foreclosure filings were reported in August, up 115% from a year ago and up 36% from July. Each home in foreclosure can have multiple filings as it moves from default status to bank repossession...."The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable-rate loans are beginning to reset," said James Saccacio, chief executive for RealtyTrac. (Marketwatch September 18th)


Source: Bank Of America






Growing Negative Phsycology

In general, Joe Six Pack (aka JOE6PAK, J6P), the ordinary person, have woken up to the reality that most bubble markets are undergoing price declines.



Seasonal Changes

Usually, prices fall a few percentage points in the fall and winter months as it is off peak season. This year due to the declining housing market the seasonal influences should have a greater downward pull on home prices.

Conclusion

With the coming of fall and winter, large inventory, slow sales, tightened lending standards coupled with increased negative buyer and seller sentiments will lead to large price declines over the next 6 months. Real dollar prices will likely decline between 6% and 13% over the course of the next 6 months in most bubble markets. Like this year's spring, spring 2008 will not stop or reverse declining housing markets.

32 comments:

  1. I don't suppose BOA provided any info about where the bulk of their subprime lending is/was... my guess is along the eastern seaboard from NC to MA.

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  2. The graph is for all lenders. As for the geogaprhical breakdown of Bank of America's subprime lending, the information was not provided.

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  3. One quirk of that graph I cannot help but notice: June through August is when Jumbos start to reset at a significant rate.

    There is no arguing the mortgage market is in pain. That graph shows how the previous nine months have been relatively easy compared to the next nine going forward. Cest la vie.

    6% to 13% over the next six months is reasonable. While a few bubble markets will do worse (WPB, Miami condos, Sacramento, San Diego, Las Vegas), for most that is a fair assumption.

    Take of the European Union regulating their bank investments in our mortgages is scary; it will further tighten up the mortgage market.

    This fall/winter will be interesting.

    Got popcorn?
    Neil

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  4. Where did little lance go?

    Shouldn't he be here lecturing us all on his made up economic theories that "prove" whatever choice he made a couple years ago must have been right?

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  5. Anonymous 9:58am, if there aren't any trolls to feed, you send out invitations? Don't be a sore winner. He's going to be busted up pretty bad by this mess and will end up paying a series of much stiffer penalties than should be assessed to someone whose crimes are merely arrogance, ignorance, and being a jerk.

    That said, I don't know that 6 - 12% is enough. I know that the housing market moves slowly, but there seems like there should be a bit of a watershed moment.

    All those auctions (your previous post) are going to turn into comps within the next two to three months. People who have been holding out for 2005 prices for the last 90 - 180 days are already hungry. Seeing the comps undercut them by 25% will have a significant psychological impact.

    I think the question is, what will be the straw? Will it be the resets through the end of the year? The comps? Neighborhoods full of homes that have been listed for over six months?

    I think 6-12% is conservative, and I think we're headed for the watershed.

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  6. Hey David,

    Maybe by next year you'll be able to afford a place. I mean, probably not. But you never know! Keep the faith!

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  7. The "bitter renter" vs "homeowner" debate will likely heat up as prices continue to fall.

    http://economicdisconnect.blogspot.com/2007/10/bitter-renters-vs-homeowners.html

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  8. Things are getting really bad out there.

    In my saved Montgomery County, MD ziprealty searches (mainly Bethesda/CC/Rockville under $400K), inventory is building daily and these condos and starter houses are simply not selling.

    Lots of nice sub $400K SFHs are available in Rockville/Gaithersburg/Germantown. Many of these are "short sale" or foreclosures. Many of these were $100K less 4-5 yrs. ago...

    I'm waiting to see how much longer sellers will hold out without more drastic price cuts.

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  9. Not to be insensitive to those that are losing $$ in real estate, but there are still several people that believe we will be back to normal by the end of the year. I do not share this view. My question is what's the best way to profit from a falling/weakening housing market? Most home builders are already down 50-70% as well as some lenders Anyway, just looking at various ideas and wanted to what people on this blog thought?

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  10. Things are getting really bad out there.

    Unfortunately true. There is a ton of "underemployment" going on. Not to mention the rather large layoffs announced in Florida. 75% of St. Joe. Ouch... I'm not sure how many contractors that just put out of work, but its sad.

    As Anon 5:40 PM noted, we just won't be back to normal for a long time. The ECB is meeting to discuss terms on how their banks will be allowed to loan for our mortgages. That's sad. We are no longer considered responsible enough to regulate our own mortgages. That will have a long term impact.

    Got popcorn?
    Neil

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  11. David,

    Where these condos included, or is the auction on the 28th a new one?

    http://biz.yahoo.com/bw/071005/20071005005542.html?.v=1

    just in case, I'll cut it in two:
    http://biz.yahoo.com/
    bw/071005/20071005005542.html?.v=1

    So if you missed the last auction, there is more action out there! ;)

    Got popcorn?
    Neil

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  12. This is sort of off topic because it really has to do with the discussion on a previous post, but I need some advice.

    I was tricked by the REIC into taking out an IO loan on my new house in early 2005. Not only that, but it was for more than I needed, by $155,000! I didn't know what to do because this was costing (net) 4 1/2% per year, but I'd read on this blog that renters were investing in things besides real estate. Then I remembered that I had some of those other investments, too. I called up my investment guy (woman, actually) and asked her if she could help me out since I'd been tricked into taking this extra $155,000 IO loan.

    It turns out she could. She added it to a $13,000 account I already had and every month she sends me a check for $600 to cover my interest on the $155,000 (and a little extra).

    Now, 30 months later, I have $215,000 in the account, but reading the posts on this blog, I feel so dumb for being tricked into an IO loan, I'm thinking I should take it all out and build up some equity now before this thing adjusts in 2012.

    I could then refinance and put that couple of hundred dollars a month into investments, just like the renters out there.

    What do you think? Would this make sense on a spreadsheet?

    Sign me as:

    Tricked, Not Dumb Like Lance

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  13. This comment has been removed by the author.

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  14. Anonymous 7:14pm, please try to keep your posts on topic. (You know, I was going to call you a troll and a coward, but I guess if you are going to admit to mortgage fraud, it makes sense to hide.)

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  15. Anon 7:14 PM,

    1) $600 per month means you are getting 4.29% on your $155K + 13K. Usually when one wishes to engage in interest rate arbitrage, one would only do so when the ROI is higher than the rate on the loan.

    2) You are most likely going to be taxed on that $600 per month.

    3) Go away Lance.

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  16. Anon 6:40 said:
    "3) Go away Lance."

    That's right, there's only one person out there who disagrees with you ... 'cause you're so smart. Why don't you own a home then? ... or own up to your posts with more than an "anon" for that matter ... ?

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  17. "Why don't you own a home then?"

    and you wonder why everyone here considers you such a jerk.

    Grow up you big baby. Just because you made a bad decision is no reason to try to talk other people into following your bad example.

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  18. That's right, there's only one person out there who disagrees with you ... 'cause you're so smart.

    It's not about disagreeing, it's about you being an annoying troll and that original post matching your M.O. You only post to get a rise out of people, not because you actually believe what you're saying.

    Why don't you own a home then?

    Who said I don't? I was pointing out that the interest rate arbitrage post was bogus.

    ... or own up to your posts with more than an "anon" for that matter ... ?

    Like "Lance" is any less anonymous.

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  19. How is borrowing money to buy long term "investments" arbitrage? And why would it be bogus? What's bogus about $18,000 of realized gain and an additional $47,000 of unrealized gain? That's about 13.5% per year - pretty good, but easy enough to find on a Morningstar fund screener.

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  20. How is borrowing money to buy long term "investments" arbitrage? And why would it be bogus?

    What is most bogus is your claim that you actually did this. You conveniently changed your numbers and details in your most recent post after I pointed out that the numbers in your first post worked out to a loss. You also have flaws in your most recent story, but I'm not going to bother pointing them out since you will just change things again, and anybody dumb enough to try to imitate you deserves to lose money.

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  21. "Like "Lance" is any less anonymous."

    It has been lately...

    Check the thread from a couple days ago if you are curious who lance is.

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  22. Most Realtors don't like any numbers getting out right now. But quite a few bloggers are tracking October closings. Preliminary numbers are down YOY tremendously. I haven't found links for DC, but if the numbers aren't there, that means something is really bad...

    Note: I'm not talking pendings. Closings are down 25% to 52% YOY in October so far. Ouch. More areas reporting towards the lower end than the upper end. If you disagree, please provide numbers that show otherwise.

    Due to the high number of escrows that do not close (or are taking suspiciously long to close), pendings are no longer a number worth discussing due to the huge faction that are not translating to closings.

    Got popcorn?
    Neil

    ps
    sources: Look at bakersfield blog, Jim the realtor's blog, etc. I just noticed every number out there for October (1st week) is ugly. I'm sure there is an area with increased YOY closings, but where?

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  23. Check the thread from a couple days ago if you are curious who lance is.

    I just did a search through the really long thread and I saw people discussing it, but no real details other than that he is in his 50's and needs to rent out his basement to make ends meet. Did I miss the meat?

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  24. Oh, I forgot to mention the press on Toll brothers, St. Joe, Standard Pacific. All the builders who have commented have noted closings in the last two weeks are falling off a cliff.

    This looks to be "the event." Sad. But no one listened to the bears. :(

    Got popcorn?
    Neil

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  25. "But quite a few bloggers are tracking October closings. Preliminary numbers are down YOY tremendously. I haven't found links for DC, but if the numbers aren't there, that means something is really bad... "

    Where can I find these numbers for NOVA?

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  26. assessed value...
    $844,680

    paid 900k

    = that sucks

    bob

    ps. everyone always crys about BH's taking pleaure in the misfortune of others. So what. They took pleasure looking down on everyone and gloating about there 900k row houses, well 844k row houses. Turn around is fair play. They created this mess.

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  27. anon, factual evidence that housing is stablized is more then welcome, its what we are seeking. Anything from the post is most likely bs. Look at caseshiller index, housing tracker, etc.
    bob

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  28. just saw a banner ad on washingtonpost.com: the last "for sale" condo building in the new Rockville Town Square has gone rental..."rent with an option to buy" to be exact.

    Of course, the other building ("Lunestra") in the Town Square had gone rental during the summer.

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  29. "just saw a banner ad on washingtonpost.com: the last "for sale" condo building in the new Rockville Town Square has gone rental..."rent with an option to buy" to be exact.

    Of course, the other building ("Lunestra") in the Town Square had gone rental during the summer."


    You people and your seedy suburbs. Who the hell cares?

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  30. "You people and your seedy suburbs. Who the hell cares?"

    Good point, who the heck would want to live in the DC area anyways? The place is a dump. NY and Chicago are pretty much the only cities in the US with any culture.

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  31. Usually, a home in DC sells $100K over assessed value. $200-250K if it has been renovated or is extremely desirable.

    If Lance only paid a little over assessed value, then he did alright so long as he didn't have to pu a ton of money inro the property for renovations.

    DC strives for 100% assessment value, but politically, raising property taxes will never be popular, so it always lags a good bit behind market value.

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  32. False and phony assessments and appraisals have been rampant in all bubble areas, especially the Washington, DC region since 2002, and building up to an idiotic creciendo in 2006. These corrupt assessment and appraisals were generated by municipalities and private parties alike. Do not believe or take comfort in any of these fabricated numbers.

    -dcandout

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