Monday, March 23, 2009

Where are we at?

Are housing markets bottoming on a national basis?

No. Prices are still falling as indicated by the recent release of the December Case-Shiller Price Index. Despite the new 8,000 home purchasing tax credit and the incredibly low mortgage rates housing prices will continue to fall as there is still a huge overhang in vacant housing units in combination with major job losses. In most markets nominal prices will not bottom until at least early 2010.

What about locally in the Washington, DC area?

In the Washington, DC metro area the majority of the nominal price declines have already occurred. Most areas will see small further price declines ( 5 - 10%). Nominal prices are likely to bottom in late 2009 or early 2010.

Do you support the federal 8,000 home purchasing tax credit?

No. The United States already spends too large a share of GDP on housing. The tax credit will temporarily increase this amount. In addition this adds more debt to the deteriorating federal balance sheet.


32 comments:

  1. I disagree with David regarding the DC metro area. It will likely reach bottom later than most of the U.S.

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  2. "In the Washington, DC metro area the majority of the nominal price declines have already occurred. Most areas will see small further price declines ( 5 - 10%). Nominal prices are likely to bottom in late 2009 or early 2010."

    Gutsy call David - but I "think" I agree. I will need a few more months under my belt to make it official.

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  3. OK, but how about the bigger picture?

    Automobile manufactuers are on their deathbeds, despite gasoline being at relative low prices. Financial institutions are on their deathbeds, and the primary focus of federal goverment is to recussitate institutions that are 'too big to fail.' The residential construction industry is literally dead. Commercial construction isn't far behind.

    In the background, political unrest has appeared over the horizon. The government is 'prining money' like never before; devaluing the currency and priming the pump for inflation. Conspicuous consumption is considered to be asking for trouble, and AIG execs are receiving death threats against their entire families.

    But we're all hopeful for a "recovery". That's nice.

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  4. "printing money"

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  5. It's tough to have inflation when people are using their money to pay debts rather than purchase goods and services.

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  6. How many (millions of) people are going into debt to buy food and medical care?

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  7. Well, credit markets are considered "frozen" and have been for some time.

    Transactions tend to happen in cash and equivalents now.

    Its a matter of "when", not "if".

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  8. "But we're all hopeful for a "recovery". That's nice."

    Recovery in housing only, which is a leading or conicident incicator. The rest of the economy will recover later. And when we say "recovery" in housing I dont think anyone means prices are "going up" - I think all it means is nominal prices quit going down....

    A recovery in the sense of prices going up is years and years away...

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  9. "James said...
    I disagree with David regarding the DC metro area. It will likely reach bottom later than most of the U.S."

    And why is that James? Per Case Shiller, DC started falling right when the whole US started falling - maybe a month or two before.

    If you look at NOVA, homes sales have been up 11 months in a row (YOY) whereas in the US they are still down YOY.

    http://www.nvar.com/MarketStatistics/tabid/224/Default.aspx

    If you look at NOVA inventory, its down YOYOYOY - down a remarkable 40% from last year.

    http://www.virginiamls.com/charts/index.htm

    NOVA months of inventory is now down to levels about 1/2 of where it was last year. On a national basis, its still exactly where it was last year.

    In fact in every category I can think of, it looks like NOVA is leading and the US is lagging far far behind.

    Do you see it differently, or is this just a case of wishful thinking because prices havent corrected as much as you want them to?

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  10. Anon:

    (a) either James or David is in denial on how much longer DC has to go.

    (b) I dont think it is David.

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  11. I think that its optimistic to call a bottom in any US housing markets in 2009. I base this on rising unemployment, difficult lending environment and extensive investment losses. The most important of these is unemployment. Unemployment in DC and the metro area is high and rising (http://www.bizjournals.com/washington/stories/2009/03/09/daily42.html?ana=from_rss). Until this trend reverses I don't forsee a price recovery or even stabilization. Many of those who still have jobs are still fearful of losing them and won't risk buying now.

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  12. "I base this on rising unemployment, difficult lending environment and extensive investment losses. The most important of these is unemployment."

    Actually, employment is a lagging indicator. If this recession is like the rest (and I dont know why it wouldnt be) unemployment will continue to rise long after a bottom has been formed.

    Your other two concerns do have some merit though, but I think they are more coincident than leading or lagging.

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  13. I think its very fitting David returns to make this call. After all, it was he who told us so long ago that the bubble would soon burst:

    http://bubblemeter.blogspot.com/2005/05/bubble-will-burst-soon.html

    This entry was met with much bullish skepticism at the time - only later did we learn David was spot on with his prediction.

    We have come along way since then. Now, after 1,682 posts over 1,397 days he is here to call bottom. Again he is met with skepticism but now of the bearish kind.

    Skepticism is good, but I for one am not going to take very very seriously any call he makes. Lord knows, he has earned it.

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  14. When I moved to Fairfax county as a teen in 1987 from being stationed overseas with my parents, their house cost them $165K. This was roughly 2X their combined annual income of $80K (close to avg income range for that time). Same house now goes for roughly $500K, which is still closes to 5X the average incoming range.

    Maybe people are just more mentally willing to take such a major hit from their earnings to pay for real estate now.

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  15. Maybe people are just more mentally willing to take such a major hit from their earnings to pay for real estate now.

    Could be. I think its just as an area becomes more crowded. In coastal CA, median housing is a ridiculous 6X earnings in NON bubble years (went up to 10X and is now coming back down). So maybe Fairfax settles in at 4X income.

    2X income can still be had, cept you need to go out to PWC (which is probably about as developed as Fairfax was in 1987).

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  16. David,

    Interesting call.

    Do you see it differently, or is this just a case of wishful thinking because prices havent corrected as much as you want them to?
    One doesn't want to see that. Just one question, does DC have any forelosure moretorium a la California? Out here is weird... everyone is talking a rebound while we all personally know several people who have gone 12+ months without making a mortgage payment (or property taxes) and often individuals who have gone 6+ months without a job.

    For I do wonder how DC can hit a bottom when tax revenue is diving. But then again, it could happen and stranger things have happened.

    In coastal CA, median housing is a ridiculous 6X earnings in NON bubble years (went up to 10X and is now coming back down). So maybe Fairfax settles in at 4X income.

    Price to income should creep up with time. The issue for Costal California is that this time *every* penny of appreciation was borrowed out. The 'property ladder' is broken. You're about to see a new case study.

    Got Popcorn?
    Neil

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  17. "Just one question, does DC have any forelosure moretorium a la California?"

    Maryland did but not NOVA, Arlington, Alexandria, Fairfax, Loudoun, Prince William, etc. there is of course, the voluntary foreclosure moratorium by some lenders, but thats a national phenomenon.

    Interestingly, last month in NOVA, foreclosures fell significantly, while they rose on the statewide scale. This is very strange because any voluntary moratorium should have helped the whole state (i.e. theres no reason why one part of the state does better YOY while the other part of the state does worse YOY).

    "For I do wonder how DC can hit a bottom when tax revenue is diving."

    Defecit spending baby! Who needs to collect tax revenue when you can just HIRE a bunch of people to print money!!!

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  18. David is channeling Lance and -poof- popcorn boi appears?

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  19. "And why is that James?....If you look at NOVA...."

    Well probably cause NOVA isnt the only DC area. Montgomery county is tanking like a mo'fo.

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  20. Employment gains may be a lagging indicator, but I don't believe prices can bottom while unemployment continues increasing. Until we see a stabilization in employment, I don't see who will be buying these homes. If you compare these 2 graphs:
    http://photos1.blogger.com/photoInclude/x/blogger/2825/754/1600/212275/EHSannual.jpg

    http://photos1.blogger.com/photoInclude/x/blogger/2825/754/1600/212275/EHSannual.jpg

    You'll see that housing sales voolume does not increase until after unemployment peaks. Then the drop in unemployment lags housing. As long as more people are losing jobs, there will not be a housing recovery or even a bottom.

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  21. "You'll see that housing sales voolume does not increase until after unemployment peaks."

    Volume is up YOY in NOVA. Also, I think its worth nothing that NOVA is still adding jobs to the local economy. Thus, any increases we've had in unemployment is more from increased population versus lack of job creation (which I agree would make a difference).

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  22. I agree that the YOY sales volume is up and inventory down in NOVA. If NOVA also is adding jobs, then that actually jibes with my contention about unemployment vs housing sales. But for the metro area as a whole, unemployment is still climbing and I'll stick to my guns that this means continued drops in housing prices. There may be some uptick in sales volumes due to foreclosures etc, but prices still will fall. But good for NOVA if it can continue adding jobs and recover quickly. I'm a housing bear, but not housing grinch.

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  23. I think I agree with you anon. My point was for NOVA, I think the big YOY declines are over. However, I think 6 months to a year of much gentler price declines is still very much on the table.

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  24. http://news.yahoo.com/s/nm/20090325/us_nm/us_usa_economy_housing

    "affordability"
    you will see more of this going forward

    the former housing bear

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  25. If Montgomery County is only 5-10 per cent away from its bottom, I guess I'll have to move out of the county when I finally buy. I won't be the only one.

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  26. Dont give up on MO CO just yet. Yes NOVA may be 5-10% from bottom, but all of Maryland has been lagging for a while.

    Lets see what happens in the next 6 months. Then, its probably safe to say Mo Co is 5-10% from bottom.

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  27. I should repeat that these price 5 - 10% declines are nominal. After the nominal price declines cease in the DC area there are likely to be a year or two where price increases do not keep up with inflation. This making them more affordable.

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  28. that increase in affordability presumes the inflation is matched by rising wages.

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  29. you can pretend like it isnt happening (affordability), but the reality is that it is here.
    i just sold a house to a renter who is going from a little two bedroom apt, to a 5 bedroom house on a huge lot in northern los angeles area.

    sounds like a reasonable trade to me. so you can claim wages vs inflation all you want. the proof is whats actually happening

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  30. "you can pretend like it isnt happening (affordability), but the reality is that it is here."

    Its really ironic when this started it was the bulls who were really in denial about this thing. Now, its the bears who have caught a bad case of denial.

    I guess its not surprising. Probably just the way things go.

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  31. i didn't mean affordability isn't happening, i meant (in response to david's comment) that affordabilty due to inflation won't happen unless incomes increase along with inflation. If inflation rates go up due to energy costs, food costs etc but I a person still is paid the same nominal wage housing doesn't become any more affordable. But its funny how fast people are to shout "You're in denial!" when they think someone disagrees with them.

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  32. But its funny how fast people are to shout "You're in denial!" when they think someone disagrees with them.

    Touche.

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